As war between the United States and Iran continues and volatility in Korea's stock market peaks, individual investors are instead rapidly increasing their investments in exchange-traded funds (ETFs). In particular, ETFs with total net assets of 1 trillion won or more have more than doubled from last year. However, as the market whipsaws between hot and cold, performance is sharply diverging by product, deepening the polarization of returns.
According to the Korea Exchange (KRX) on the 13th, from the 3rd to the 12th of this month, individual investors recorded net purchases of 66.881 trillion won in domestically listed ETFs. Since on the 4th, when the KOSPI posted its largest drop on record, they have continued a net-buying streak for six straight sessions. During the same period, average daily ETF transaction value was 21.893 trillion won, showing clear vigor in ETF trading despite market instability.
The ETF market is also expanding rapidly. According to the Korea Financial Investment Association, as of the 12th, domestic ETF total net assets stood at 377.3989 trillion won. Net worth that was 184.0995 trillion won a year ago has grown by about twofold.
So-called "1 trillion club" ETFs with total net assets exceeding 1 trillion won have also increased significantly. As of the 12th, among 1,075 ETFs listed in Korea, 79 had total net assets of at least 1 trillion won. Compared with Mar. 12 last year, when only 36 ETFs had net assets over 1 trillion won, the number has more than doubled (119.4%). There were also 13 mega-sized ETFs with net assets exceeding 5 trillion won.
ETFs in particular bulked up during the bull market when the KOSPI kept rising. From just after last year's presidential election to the end of July, the number of ETFs with total net assets of at least 1 trillion won increased by nine, and during the period when the KOSPI moved from 4,000 points to 5,000 points (Oct. 27–Jan. 27), the number increased by 16.
Kang Hyun-gi, a DB Securities researcher, said, "Based on past experience, frictions between the United States and certain Middle Eastern countries have often ended as short-term events, which appears to have fueled expectations that stock prices would rebound after a brief correction," adding, "ETFs, in particular, have diverse product structures, allowing strategic responses to events like this, which is boosting their popularity."
However, with sharp swings repeating this month, ETF performance diverged starkly. From the 3rd to the 12th, among the top 50 ETFs by transaction value, only six domestic index-tracking and domestic equity ETFs generated gains. While inverse, defense, and gold ETFs posted gains, semiconductor and secondary battery-related ETFs that had been market leaders plunged from at least 8% to more than 30% for leveraged products.
Kang said, "This month the KOSPI has plunged by more than 10%, and as the Middle East situation keeps shaking the market, only products related to defense stocks that emerged as beneficiaries and gold spot products classified as safe assets appear to have generated gains."
Investments in leveraged and inverse ETFs are also increasing amid a volatile market. So far this month, individuals have net-bought 630.2 billion won of KODEX Leverage and 363.5 billion won of KODEX KOSDAQ150 Leverage. From the 3rd to the 12th, all of the top six issues by trading volume were inverse or leveraged products. By total net assets, KODEX Leverage ranks 10th at 5 trillion won, and KODEX KOSDAQ150 Leverage is also at 4.8886 trillion won, on the verge of joining the "5 trillion club."
However, some caution that one should be careful with leveraged or inverse investing as uncertainty grows. Park Woo-yeol, a Shinhan Investment & Securities researcher, said, "Leveraged products are not suitable for a long-term investment perspective because of negative compounding," adding, "Because they track twice the index's daily return, even if the index moves sideways with repeated ups and downs, leveraged products can suffer larger losses."