ETF Riding the Wave of Volatility... Trading Volume Jumps 5-Fold

[Asia Economy Reporter Koh Hyung-kwang] The exchange-traded fund (ETF) market is experiencing an unprecedented boom. Nearly 7 trillion won in funds are traded daily, comparable to the KOSPI trading volume. As the volatility of the stock market increased due to the novel coronavirus disease (COVID-19), investors have flocked to the ETF market because they can fully leverage the benefits of leverage and inverse effects and trade more easily compared to funds.

According to the Korea Exchange on the 17th, the average daily trading volume of ETFs this month reached 6.5985 trillion won, more than five times last year's average of 1.3332 trillion won. The average daily trading volume of ETFs, which was around 1.7296 trillion won in January this year, increased to 2.3597 trillion won in February amid heightened volatility due to COVID-19, and surged to 6.8572 trillion won in March, showing a continuous increase.

This year, there have been 10 days when the daily trading volume exceeded 8 trillion won, the average for the KOSPI market. Notably, on the 19th of last month, the daily trading volume surpassed 14 trillion won, exceeding the KOSPI trading volume of 11.9324 trillion won on the same day.

Individual investors are leading ETF trading. Since mid-March, the scale of investment has rapidly increased, with daily purchases ranging from a minimum of 3 trillion won to nearly 6 trillion won, indicating high participation. Foreign investors also trade ETFs for stock hedging, but in terms of amount, they lag behind individuals.

ETFs are products that list index funds on the exchange, allowing investors to trade them conveniently like stocks. They combine the advantages of fund investment, where investors do not have to select individual stocks, and stock investment, which allows trading anytime in the market.

The recent influx of individual investors into ETFs is due to the strong returns in volatile markets. The ETF market has a high proportion of leveraged products that can yield twice the index return and inverse products that profit when the index falls. Leveraged and inverse products accounted for about 80% of ETF trading volume in March.

Ryu Jong-ha, a researcher at Hana Financial Investment, explained, "As the stock market experienced sharp fluctuations, trading of index-related ETF products like KODEX 200 and KODEX Leverage surged." He added, "Because ETFs allow risk diversification and easy trading, even those unfamiliar with stocks tend to invest in ETFs." He also said, "The reason ETFs are especially popular among individuals is that they can bet on returns other than stock price increases. Individual investors have had significant frustration and dissatisfaction due to the lack of short-selling tools to prepare for domestic and international market declines compared to institutions or foreigners."

However, it should be noted that ETFs can yield large profits due to price volatility but also carry a high risk of significant losses. ETFs betting on the decline of international oil prices have yielded returns of 70-80% this year alone, while ETFs betting on oil price increases have halved in value.

There is also concern that many of the top ETF trading volume stocks are leveraged and inverse products, which warrants reconsideration. Kim Nam-gi, head of the ETF management division at Mirae Asset, said, "Unlike overseas investors who hold general ETFs for long-term investment, domestic investors tend to use leveraged and inverse ETFs for short-term trading purposes." He added, "Although there is an excessive concentration on certain stocks, we expect the market to mature through continuous investment experience."

This content was produced with the assistance of AI translation services.