# The funds flowing into U.S. exchange-traded funds (ETFs) have reached a record high this year. According to Bloomberg, the total amount of money that entered U.S. ETFs from the beginning of the year until Nov. 15 (local time) was $913 billion (approximately 1.277 trillion won). With a month and a half left until the end of the year, it has surpassed the previous record of $910.7 billion set in 2021. The net inflow into U.S. ETFs for 2019 was $336.9 billion (approximately 471.29 trillion won), but this year it is expected to exceed $1 trillion (approximately 1.3989 trillion won). Bloomberg reported, “2024 will be a groundbreaking year for ETFs.”
# According to ETFGI, a global ETF research firm, a total of 1,426 new ETF products were launched worldwide from January to September this year. This represents a 32% increase compared to the same period last year (1,079 products). This is the highest number on record. As of the end of September this year, the global assets under management (AUM) for ETFs amounted to $14.46 trillion (approximately 22.28 quadrillion won), also the highest on record.
This illustrates the popularity of ETFs in the investment market. An ETF refers to a fund that is listed on an exchange and can be bought and sold like a stock. It combines the benefits of reducing investment volatility by bundling multiple stocks instead of individual stocks and the advantages of real-time trading of stocks. Another advantage of ETFs is that they allow investment in hard-to-reach assets like bonds or crude oil with a small amount of capital. ‘The Economy Chosun’ asked domestic and foreign asset management corporations and investment experts about the advantages of ETFs, specific investment strategies, and promising investment destinations for the upcoming year.
“ETFs are superior to funds”
ETFs first appeared in Canada in 1990, tracking the Toronto 35 Index. In the United States, the first ETF, ‘SPDR S&P 500 ETF (SPY),’ debuted in 1993. This product, which tracks the S&P 500, became the first-ever ETF to surpass $600 billion (approximately 839.34 trillion won) in assets under management in October. In Korea, Samsung Asset Management introduced the ‘KODEX 200 ETF,’ which tracks the KOSPI 200, in 2002. The rapid growth of ETFs occurred after the global financial crisis in 2008, when perceptions grew that the returns of active funds struggled to exceed those of benchmark indices. There was a surge in passive investment that tracks indices, and the investment sentiment shifted toward ETFs due to their low fees and ease of trading. The largest market for ETFs is the United States, where approximately 70% of ETF assets are invested.
ETFs help investors easily follow the adage, “Do not put all your eggs in one basket.” To purchase one share each of the 200 stocks in the KOSPI 200 would require about 18 million won, but by investing in the KODEX 200 ETF, an investor can achieve exposure to all 200 stocks with about 30,000 won. Additionally, ETFs usually have low fees around 0%, which provides tax benefits. In the U.S., capital gains tax arises when a fund manager buys and sells securities within a fund, whereas in ETFs, capital gains tax is only incurred when the investor sells, providing substantial tax advantages. This method of maximizing tax benefits by investing in ETFs through pension accounts is widely practiced in Korea.
Michael McCleary, Chief Investment Officer (CIO) of Valmark Financial Group, explained in an interview with CNBC, “Simply put, the structure of ETFs is superior to that of funds.” According to Morningstar, the assets under management of U.S. ETFs have grown from 14% of total U.S. fund assets in 2014 to 32% this year. In Korea, the proportion of ETF assets relative to public funds has increased from 30.1% in 2020 to 58.6% in September of this year. Joo Yun-shin, a research fellow at Hana Financial Group, noted, “ETFs have established themselves as an investment tool that replaces part of direct investments and public fund markets.”
Parking type and monthly dividends: The evolution of ETFs
While passive ETFs that track indices are foundational, actively managed ETFs, where fund managers actively intervene in asset management, are also increasing their influence. A representative example of active ETFs is the “Innovation ETF” from ARK Investment, led by CEO Cathie Wood. It holds shares of innovative companies like Tesla, streaming platform Roku, and cryptocurrency exchange Coinbase. It gained worldwide recognition by recording a revenue rate approaching 150% during 2020. However, active ETFs tend to experience significant fluctuations. The Innovation ETF is currently trading at around $60, which is less than half of its peak of $156.58 in February 2021.
Not only stock-type ETFs exist. As ETFs have gained prominence, commodity ETFs that invest in oil, gold, silver, and agricultural products, bond-type ETFs that invest in U.S. long-term bonds, and currency-type ETFs that invest in currencies like the U.S. dollar and Japanese yen have also emerged. Among domestic investors today, the most spotlighted product is the parking-type ETF. Parking-type ETFs reflect interest rates of short-term bonds, such as 91-day certificates of deposit (CDs), calculated daily with compound interest. They have been growing in size while replacing the role of bank deposit ‘parking accounts’. According to Koscom, the top two ETFs by fund inflow in Korea this year were both parking-type ETFs: ‘KODEX Money Market Active’ and ‘KODEX CD Rate Active (Synthetic).’ ‘KODEX Money Market Active’ surpassed 3 trillion won in net worth just 76 business days after its listing.
In January of this year, the U.S. Securities and Exchange Commission (SEC) approved the first Bitcoin spot ETF, leading to a surge in investments in cryptocurrency ETFs. Thanks to the rise of Bitcoin, BlackRock’s “iShares Bitcoin Trust ETF (IBIT)” rose by approximately 94.99% this year, marking the highest revenue rate among U.S. ETFs. It was recorded as the ETF that reached $30 billion (approximately 41.967 trillion won) in assets the fastest in the country.
ETFs utilizing option strategies are also noteworthy. The bond-type monthly dividend ETF ‘TI-GER U.S. 30-Year Treasury Covered Call Active (H) ETF’ from Mirae Asset Global Investments exceeded 1 trillion won in net worth last October. It invests in U.S. long-term bonds and pays monthly dividends, making it the first covered call ETF listed domestically to surpass 1 trillion won in net worth. Covered call ETFs distribute profits obtained from the sale of call options to investors as dividends. There are also buffer-type ETFs that use both call options (the right to buy at a set price) and put options (the right to sell at a set price) to hedge against investment losses. These products limit profits but compensate for losses that exceed a pre-determined range.
Korea shaken by emergency martial law; prospects look good for the U.S. next year
This year, the U.S. has stood out in the ETF market. According to Morningstar, the ETFs with the highest inflows globally were the ‘Vanguard S&P 500 ETF (VOO)’ in first place and the ‘iShares Core S&P 500 ETF (IVV)’ in second place. Riding the S&P 500’s upward trend, both ETFs rose approximately 28% this year. According to Koscom, U.S. ETFs also dominated the top-performing segment in Korea's market. The top spot went to the ‘ACE U.S. Big Tech TOP-7 Plus Leveraged (Synthetic) ETF,’ which focused on major tech corporations in the U.S. with a revenue rate of 131.96%. The ETF with the highest return, excluding leveraged products, was ‘KODEX U.S. Semitaper,’ with a revenue rate of 76.65%. This product invests in the 25 stocks most favored by domestic individual investors engaging in overseas stock investments.
Expectations for the U.S. stock market remain high this year. Elaine Wu, Head of Asia-Pacific Investments for BlackRock, noted in an interview with ‘The Economy Chosun’ that “the U.S. economic growth remains solid” and advised that investing in the U.S. would be advantageous in the new year. Kim Do-hyung, head of ETF consulting at Samsung Asset Management, predicted, “Where there is performance, there is stock price growth, and right now, the place achieving the largest innovation and growth in the world is the U.S.” He forecasted that U.S. ETFs would remain popular in the new year. Among emerging market ETFs, India, Taiwan, China, and Brazil are attracting attention.
The KODEX 200 ETF, which tracks the KOSPI 200, recorded a revenue rate of -6.2% as of market close on Dec. 3. Additionally, the emergency martial law declared on Dec. 3 has created a cooling atmosphere for investment sentiment. On Dec. 4, foreign investors conducted a net selling of 420 billion won in the domestic stock market. The ‘iShares MSCI Korea ETF (EWY),’ listed on the U.S. market, fell as much as 7.1% during intraday trading on Dec. 3 (local time), the first trading day after the emergency martial law. Yoo Dong-won, head of global asset allocation at Yuanta Securities Korea, stated, “Foreign investors are likely to perceive increased investment risks in Korea, which will lower the value of the domestic stock market,” adding that “investing in dollar assets is exceedingly important at this point.”