Are Asian ETFs Facing Risks Due to the Combined Impact of War and Tariffs?

Asian Markets Face Dual Economic Shocks

Asia is currently contending with two major economic challenges: a dramatic spike in oil prices and worsening supply chain disruptions. The ongoing Middle East conflict has pushed Brent crude above $100 a barrel, putting significant pressure on energy-reliant nations like South Korea, India, and Japan.

Compounding these issues, regional stock markets are experiencing heightened volatility due to new trade tensions. The recent initiation of Section 301 trade investigations by the Trump administration, along with Section 122 tariffs imposed on February 24, has introduced fresh uncertainty for Asia’s manufacturing sectors.

This combination of war-driven inflation and protectionist trade measures is putting the durability of Asian equities and the exchange-traded funds (ETFs) that track them under intense scrutiny.

Given these developments, it is crucial to assess how Asian stock markets are responding to these simultaneous pressures and whether the ETFs tied to them are facing lasting risks or simply a short-term setback before a potential rebound.

Market Volatility Sweeps Across Asia

Stock exchanges from Seoul to Mumbai have seen rapid and severe declines, with foreign investors withdrawing capital from emerging Asian markets at the fastest rate in nearly four years.

For example, South Korea’s KOSPI index experienced its steepest single-day drop since 2008, falling 12% on March 4 amid concerns over rising energy costs and U.S. trade probes. India’s Nifty 50 also came under sustained pressure, particularly as the country imports over 80% of its oil needs.

By March 5, 2026, international investors had sold a net $11 billion in shares across developing Asian markets (excluding China), marking the largest outflow since March 2022.

Conversely, in the five days leading up to March 12, 2026, leveraged Asian ETFs attracted $4.5 billion in new investments, reflecting a surge of cautious capital. This trend suggests that further escalation in the Middle East or additional trade uncertainty could prompt rapid sell-offs and significant fund outflows.

Is Asia Facing a Short-Term Dip or a Lasting Decline?

The future of Asian equities and their associated ETFs is currently a tug-of-war between enduring growth prospects and immediate economic pressures. Despite recent setbacks, the region’s fundamentals remain strong.

Prior to the latest turmoil, the MSCI Asia Pacific Ex-Japan Index had soared, with South Korea’s market jumping 24% in January alone, largely driven by advances in artificial intelligence. Strong earnings growth, especially in technology, indicates that Asian markets could recover once geopolitical tensions ease.

ETF adoption in Asia reached new highs last year, with assets in locally domiciled ETFs surpassing $2.4 trillion and net inflows totaling $600 billion over the past two years. Asia is poised to play a significant role in global ETF growth and innovation by year-end.

While the current turbulence is challenging, it appears to be a temporary phase. The Asian ETF sector is well-positioned for a strong recovery and could emerge even more prominent on the global stage once these headwinds subside.

Key Asian ETFs to Watch

Amid ongoing volatility, several Asian ETFs stand out for investors with a long-term perspective:

• iShares MSCI South Korea ETF (EWY)
  This fund holds $16.67 billion in assets and invests in 81 major South Korean companies. Its largest sector allocations are Information Technology (46.12%), Industrials (21.62%), and Financials (10.85%).
  EWY has declined 18.4% since the Middle East conflict escalated on February 28, 2026, but is up 125% over the past year. The expense ratio is 0.59%.
• iShares MSCI Japan ETF (EWJ)
  With $18.98 billion in assets, this ETF covers 179 leading Japanese companies. Top sectors include Industrials (26.69%), Financials (16.95%), and Consumer Discretionary (16.05%).
  EWJ is down 8.9% since February 28, 2026, but has gained 25.2% over the last year. The fund charges 0.49% in fees.
• iShares MSCI Emerging Markets Asia ETF (EEMA)
  This ETF manages $1.25 billion and invests in 875 companies across Asian emerging markets. Its largest sectors are Information Technology (37.30%), Financials (16.94%), and Consumer Discretionary (12.14%).
  EEMA has dropped 8.8% since February 28, 2026, but is up 30.7% over the past year. The expense ratio is 0.49%.
• iShares Asia 50 ETF (AIA)
  With $2.96 billion in assets, this fund provides exposure to 53 prominent Asian firms. The top sectors are Information Technology (54.68%), Financials (18.19%), and Communication (12.66%).
  AIA has fallen 9.4% since February 28, 2026, but has surged 45.5% over the past year. The fund’s fee is 0.50%.
• iShares MSCI All Country Asia ex Japan ETF (AAXJ)
  This ETF holds $3.64 billion in assets and invests in 905 companies from both emerging and developed Asian markets, excluding Japan. Its main sectors are Information Technology (37.31%), Financials (18.59%), and Consumer Discretionary (11.08%).
  AAXJ has decreased 8.5% since February 28, 2026, but is up 31.2% over the past year. The expense ratio is 0.72%.

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