Investment Strategies During Interest Rate Hikes... Focus on REITs, Banks, and Secondary Battery ETFs

Reduce Loans and Shorten Deposit Terms... Benefit from Interest Rate Hikes

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[Asia Economy reporters Yu Je-hoon and Hwang Yoon-joo] The U.S. Federal Open Market Committee (FOMC) has raised the benchmark interest rate by 50 basis points (1bp=0.01%) in a single move for the first time in 22 years with a ‘Big step,’ and hinted at the possibility of further hikes within the year, deepening investors' concerns. The financial sector advises that due to the inevitable weakness in the asset market caused by such interest rate increases, it is wise to reduce debt, increase cash holdings, and consider investing in REITs (Real Estate Investment Trusts) or ETFs (Exchange-Traded Funds) focused on high-dividend and banking stocks.

Keep deposit and savings terms ‘short’

As the asset market is expected to remain weak, the phenomenon of ‘reverse money move,’ where funds flow back into banks, is expected to intensify for the time being. Both the FOMC and the Bank of Korea have indicated 2 to 3 additional rate hikes within the year, and factors such as the Russia-Ukraine war and the Shanghai lockdown in China are imposing constraints on the asset market.

The financial sector recommends setting relatively short terms for deposit and savings products in anticipation of further benchmark rate hikes this year. A representative from a commercial bank said, "It is advisable to keep deposit and savings maturities relatively short, such as 3 months, 6 months, or 12 months, to fully benefit from the interest rate increases."

Reduce spending and debt... Consider ‘refinancing’

With market interest rates soaring, it is necessary to reduce expenditures through rational and planned consumption and also to decrease various loans such as credit loans. For mortgage loans, refinancing to a fixed interest rate can be considered depending on the individual's repayment plan. Typically, if a loan is canceled before three years have passed since execution, a prepayment penalty of up to 1.2% is charged. However, if there is no long-term repayment plan and the penalty is less than the benefits from refinancing, refinancing is worth considering.

For loans scheduled to be repaid within one year and not requiring refinancing, using a ‘minus account’ (overdraft account) is also a practical method. Even if the interest rate is somewhat higher, using a minus account can temporarily reduce the overall debt size when funds such as salary inflows reduce the liquidity debt.

Post-COVID promising asset: ‘REITs’

These products distribute most of their investment income as dividends to investors and have the advantage of high growth potential in real estate such as logistics centers after COVID-19. In fact, REITs have recorded double-digit high returns during this year's market downturn. Samsung Asset Management recently highlighted the ‘KODEX Dow Jones U.S. REITs ETF’ as a product to watch. This ETF diversifies investment across advanced REITs in various sectors such as cell towers (infrastructure), data centers, logistics warehouses, shopping malls, and offices in the U.S., the world's largest REIT market.

Mirae Asset Management recommended REITs focusing on income returns and those related to logistics centers. The ‘TIGER Real Estate Infrastructure High Dividend ETF’ had a distribution rate (dividend yield) of 5.27% in 2021. It is a representative product focusing on income returns generated during the holding period rather than capital gains from valuation and trading.

Also pay attention to high-dividend and banking ETFs

High-dividend ETFs and banking ETFs were also included in the recommended list. Samsung Asset Management’s ‘KODEX High Dividend ETF’ invests in KOSPI index constituent stocks with high dividend yields and low volatility. The appeal of relatively stable dividend stock investment increases during periods of rising interest rates when stock prices are sluggish. Especially in an inflationary environment, dividend yields can outperform stock returns, so investing in dividend stocks is recommended.

The ‘KODEX Banking ETF’ consists of 10 representative stocks in the domestic banking industry. Banks are a sector that benefits significantly from rising interest rates, as loan interest rates rise faster than deposit rates, increasing net interest margin (NIM) and raising expectations for dividend expansion.

Future growth driver: Secondary battery active ETF

Secondary battery-related products are also considered alternatives. Secondary battery-related stocks continue to perform well even in a downturn. KB Asset Management’s ‘KBSTAR Secondary Battery Active ETF’ is the industry’s first active secondary battery ETF. It maintains a correlation of about 0.7 with the underlying ‘iSelect Secondary Battery Index’ and adjusts its portfolio according to market conditions.

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