Korea's stock market is hot. The KOSPI index has set a record high day after day, climbing to the 4,100 level. The KOSDAQ index is hovering around 900. It looks like a bull market where everyone should be happy, but if your returns are weak against the market, it hurts. If you are sitting on unrealized losses, it is even more depressing.
In the financial investment industry, they say using exchange-traded funds (ETFs) helps individual investors more than picking single stocks. On closer look, that proved true.
According to the Korea Exchange (KRX) on the 1st, among domestic equity ETFs, 366 ETFs could have their year-to-date returns measured from the start of the year. Of the 327 excluding leveraged and inverse types, 324 (99.1%) saw their prices rise as of Oct. 31 from the end of last year. Amid weakness in game shares, only three products — "TIGER K-Game," "RISE Game Theme," and "KODEX Game Industry" — posted year-to-date returns around -2%.
By contrast, more individual stocks fell. In the KOSPI market, of 951 stocks whose returns could be measured as of Oct. 31 from the end of last year, 284 (29.9%) declined. The KOSDAQ market looks even worse. By the same yardstick, of 1,729 stocks, 693 (40.1%) have dropped in price this year.
The simple average year-to-date price increase without market-cap weighting was 27.2% for individual KOSPI stocks and 21% for individual KOSDAQ stocks. Domestic equity ETFs dominated at 62.8.
Put simply, investors who used ETFs likely had a higher chance of outperforming those who invested in individual stocks.
This is the result of product characteristics meshing with market conditions. ETFs track underlying indexes. While the components and weights of the underlying index differ by ETF, they basically hold more of larger market-cap stocks. Even active ETFs, where managers have more discretion, still track 70% of their benchmark.
This year, large caps have led Korea's stock market. Samsung Electronics and SK hynix are typical examples. The advance-decline ratio (ADR) shows this well. The ADR is a percentage that divides the number of rising stocks by the number of falling stocks over a set period. It usually uses 20 trading days.
Even on Oct. 31, when the KOSPI index closed at a record high of 4,107.5, the ADR was 88.96%. That means there were more decliners than gainers. The KOSDAQ index's ADR was 78.02%, not far from 75%, commonly seen as a bottom range. In a market like this, unless you periodically rebalance — like an ETF does using market cap and other criteria — you are relatively likely to be left behind.
Of course, if you invested in inverse ETFs that track stock moves in reverse, ETFs may not have helped. "KODEX Inverse," which individuals bought 412 billion won worth of this year, fell 46.5% year to date.
That is why some say personal pension accounts performed better than ordinary stock accounts. Personal pension accounts cannot invest in individual stocks or in inverse and leveraged ETFs.
Already, more investors are buying ETFs through personal pension (DC, IRP, and pension savings) accounts. At Samsung Securities, customers holding ETFs in personal pension accounts more than doubled from 163,100 at the end of 2023 to 357,000 at the end of September this year. Over the same period, ETF holdings per person (balance ÷ number of customers) rose from 19 million won to 30.5 million won.
It is understandable to be drawn to single stocks. There are cases like WONIK HOLDINGS achieving a "ten-bagger" — a stock that rises more than tenfold — in just a year. Even so, among domestic equity ETFs, the top year-to-date performer "PLUS K-Defense" rose more than threefold, and "HANARO Nuclear iSelect" and "TIGER 200 Heavy Industry" also posted share price gains around 190%.
In a market where FOMO — the fear of missing out — can flare up, it may be better to consider using ETFs rather than blindly jumping into individual stocks. Not everyone has a knack for investing, and beating the market is even harder.