The Bank of Korea emphasized the need for diversification for individual investors investing in overseas stocks, commonly referred to as "forex ants." In particular, it advised reducing excessive concentration on certain stocks, including the "Magnificent 7" (M7) representing major U.S. technology stocks and leveraged ETFs.
Lee Jae-min, Director of the Overseas Investment Analysis Team at the Bank of Korea, and Jang Ye-jin, researcher, noted on the 26th in a post on the Bank of Korea blog titled "Forex ants: it's time for diversification".
According to researchers, individual investors have sharply increased their investments in overseas stocks since the outbreak of the COVID-19 pandemic in 2020. The balance of overseas stock investments by individual investors rose from $15.2 billion at the end of 2019 to $116.1 billion at the end of last year, growing approximately 7.6 times in five years.
Investments in overseas stocks by individual investors have particularly concentrated in U.S. stocks. According to data from Korea Securities Depository (SEIBro), the proportion of U.S. stocks in individual investors' portfolios expanded from 58.2% at the end of 2019 to 88.5% at the end of 2023, and on the 18th, it rose to 90.4%.
The top 10 stocks most held by individual investors consisted solely of U.S. stocks, including Tesla, Nvidia, Apple, and Google, as well as general and leveraged exchange-traded funds (ETFs) tracking the M7 and NASDAQ 100 and S&P 500 indices. The investment balance for these stocks was $45.4 billion as of the 18th, accounting for 43.2% of total investments.
Researchers analyzed that forex ants generally exhibited a propensity for risk-seeking. The top 50 investment stocks included seven leveraged ETFs and inverse ETFs. Leveraged ETFs seek returns of more than double the performance of their underlying indices, while inverse ETFs seek to achieve reverse returns, and these are primarily held by investors aiming for short-term returns with higher risk volatility.
Particularly, when looking at leveraged ETFs and inverse ETFs included in the top 50 investment stocks, the equity ratio of individual investors surpassed 10% of the total market capitalization across all of them. Some stocks accounted for over 40%. There was a notable trend of individual investors flocking to ETFs tracking the revenue of popular individual stocks like Tesla and Nvidia, highlighting their risk preference.
Researchers expressed concern that if such investment behavior continues, individual investors could experience greater losses when the U.S. stock market weakens. Recently, the S&P 500 index recorded a historic high of 6,144.15 on the 19th of last month amid expectations for policies from a second Trump administration following the U.S. presidential election, but it has since fallen due to concerns over tariff policies and worsening corporate earnings. Notably, even though the performance of M7 stocks generally exceeded market expectations in the fourth quarter of last year, the earnings outlook for the first half of this year has deteriorated.
Director Lee emphasized, "In a situation where uncertainty is increasing, if losses occur, it is important to accumulate a certain level of revenue over a long period to recover them," adding that "to achieve stable investment returns, efforts are needed to reduce excessive concentration on certain stocks like M7 and leveraged ETFs and to diversify risks."