[Practical Investment] ETFs Gaining Attention as Stock Market Volatility Increases

Stock Market Outlook 'Sangjeohago'... Timing of Rebound Uncertain
Growing Need for Asset Allocation Sparks Interest in Various ETFs

[Asia Economy Reporter Hyungsoo Park] Unusually, both the stock and bond markets performed poorly last year. This was due to the US Federal Reserve (Fed) rapidly raising interest rates to curb the worst inflation in 40 years, increasing concerns about an economic recession. The war between Russia and Ukraine, which caused raw material shortages, was also a negative factor. Investors felt the need for a 'stable portfolio.'

Most stock market experts expect the domestic stock market to show a weak trend in the first half of this year and rebound in the second half. However, opinions differ on the timing of the rebound. Woongchan Lee, a researcher at Hi Investment & Securities, said, "As interest rate hikes begin to have a full impact on the real economy, the US economy is in a downward phase," but added, "It is not easy to predict the speed and extent."

Moreover, although the domestic stock market experienced a significant decline last year, given the many variables, it may be premature to engage in bargain buying. Donggil Roh, a researcher at Shinhan Investment Corp., advised, "Since signs of a slowdown in US wage growth are not yet clear, concerns about monetary tightening may continue," and "For the stock market to seek a rebound, it is necessary to confirm the end of earnings estimate declines or signs of slowing US wage growth."

ETF Combining the Advantages of Stocks and Funds

Amid high volatility in the stock market, Exchange Traded Funds (ETFs), which combine the advantages of stocks and funds, are gaining popularity. The total assets under management (AUM) of domestic ETFs reached 78.51 trillion KRW last year, an increase of about 6% compared to 74 trillion KRW in 2021. Although the stock market was sluggish last year, new types of ETF products such as Tiger CD Interest Rate Investment KIS (synthetic) and KODEX KOFR Interest Rate Reactive (synthetic) attracted market funds.

ETFs traded on the stock market offer greater asset allocation effects than investing in individual stocks. ETFs are a type of index fund. Stock ETFs are required to diversify investments into at least 10 different stocks, with no more than 30% invested in a single stock. They transparently disclose which assets they invest in and can be traded in real time like stocks. Also, like stocks, cash can be secured two days after selling.

ETFs come in various types, including index, sector, overseas index, and bond ETFs. Sector ETFs tracking specific industries such as semiconductors and secondary batteries, as well as theme ETFs tracking high-dividend stocks, media and content stocks, and Samsung Group stocks, have attracted attention in recent years. ETFs that inversely track indices can generate profits even in bear markets.

Although the bond market was also sluggish last year, interest in bonds has increased. Bond ETFs have gained attention because rising interest rates allow for higher interest yields than in the past. Junki Cho, a researcher at SK Securities, explained, "Among bond ETFs, funds are flowing into maturity-matching bond ETFs," adding, "The Korean-listed maturity-matching bond ETF, first listed on November 22 last year, doubled its AUM within about a month."

Maturity-matching bond ETFs differ from traditional bond ETFs in that they have a maturity date. Holding them until maturity allows investors to receive interest income close to the announced yield. Even before maturity, investors can secure profits or reduce losses through real-time trading. The variety of maturity-matching bond ETFs listed domestically is expected to increase.

Interest in Maturity-Matching Bonds and Theme ETFs

Among theme ETFs, US infrastructure, robotics, and eco-friendly themes are promising. Theme investing focuses intensively on structurally growing sectors. US infrastructure theme ETFs, robotics theme ETFs, and eco-friendly theme ETFs were identified as promising investment destinations. Jaeseok Ha, a researcher at NH Investment & Securities, explained, "Reshoring of companies that had expanded overseas is not a short-term theme but a mid-to-long-term trend," adding, "Increased manufacturing investment due to US reshoring will benefit related industries such as construction, building materials, and machinery." He continued, "Major countries like the US and Europe face a dilemma between energy security and eco-friendly transition," emphasizing, "With high energy prices maintained, eco-friendly investments will continue."

With the active overseas expansion of domestic content, interest in K-Culture theme ETFs has also grown. Not only K-pop but also domestic video content is gaining recognition overseas, showing structural growth. Last year, a K-pop ETF was listed on the US stock market.

Taehyun Seol, a researcher at DB Financial Investment, said, "There are ETFs that allow simultaneous investment in representative electric vehicle and semiconductor companies in Korea and China," explaining, "Investing simultaneously rather than in a single index helps diversify country risk." He advised, "Since both Korea and China strongly intend to develop the electric vehicle industry as a major national industry, it is necessary to approach it positively from a long-term perspective."

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