Overseas Korean Investors Focusing on Bond ETFs

Among the Top 20 Overseas Securities by Net Purchase, 8 Bond ETFs
Monthly Dividend Type for Cash Securing and Capital Gains Expectation

[Asia Economy Reporter Minji Lee] As interest in bond investments grows, foreign investors in Korean stocks, known as Seohak Gaemi, are also focusing on buying bond exchange-traded funds (ETFs) to adjust their portfolios. This is because they believe that bond yields will be higher than stock returns for the time being. This contrasts with just a year ago when they heavily purchased technology stocks.

According to the Korea Securities Depository, among the top 20 net purchased overseas stocks from the 1st to the 13th of this month, eight were bond-type ETFs. The ETF most purchased by these investors was the ‘JP Morgan Ultra Short Income ETF’ (JPST), with a net purchase amount of 48.5 billion KRW.

This is a monthly dividend ETF investing in dollar-denominated short-term bonds with maturities under one year, including government and corporate bonds. It has very low volatility, and the dividend yield is only about 1% annually. It is used more as a temporary place to park funds when unpredictable financial markets are expected rather than for profit-seeking purposes. The ‘SPDR Bloomberg 1-3 Month Ultra Short Term Bond ETF,’ which investors net purchased 9.8 billion KRW during the same period, is used for the same purpose. With the dominant view that the U.S. Federal Reserve’s (Fed) aggressive rate hike policy is nearing its end, investors maintaining a wait-and-see stance ahead of the Federal Open Market Committee (FOMC) meeting on the 1st of next month are analyzed to have bought this ETF.

Investors have also actively jumped into purchasing high-yield bonds with monthly dividends. Their strategy is to receive interest payments of 4-6% annually as monthly dividends to create a stable cash flow and to enjoy capital gains when interest rates decline. This judgment is based on the expectation that the Fed will slow the pace of rate hikes as inflation continues to ease. Yoonjung Park, a researcher at NH Investment & Securities, said, “Considering that the December Consumer Price Index (CPI) release clearly showed signs of easing in goods and housing prices, the Fed will slow the pace of rate hikes,” adding, “A 25 basis point (1bp=0.01 percentage point) hike is expected at the February FOMC.”

Following JPST, the ‘iShares iBoxx High Yield Corporate Bond ETF (HYG, 30.1 billion KRW)’ was heavily purchased. This ETF invests in BBB-rated speculative-grade corporate bonds. The expectation is that the creditworthiness of these companies will improve once rate hikes end. This ETF fell about 16% over the past year due to rising interest rates causing bond prices to drop, but it has risen more than 3% this year amid growing expectations of rate cuts. Additionally, the ‘VANECK JP Morgan Emerging Markets Local Currency ETF (EMLC, 20.4 billion KRW)’ and the ‘iShares JP Morgan Dollar-Denominated Emerging Markets Bond ETF (EMB, 16.6 billion KRW),’ which invest in emerging market local currency bonds and dollar-denominated emerging market bonds respectively, are expected to benefit from rising emerging market sovereign bond prices when rate cuts arrive.

Unwavering investor sentiment toward U.S. long-term bonds was also observed. Investors purchased 230 billion KRW worth of the ‘Direxion Daily 20+ Year Treasury Bull 3X ETF (TMF),’ which aims to deliver three times the daily performance of the U.S. 20-year Treasury bond index, in the second half of last year (July 1 to December 31), and have bought an additional 24 billion KRW this year. Although opinions differ on further investment due to bond yields having fallen significantly amid expectations of rate cuts, the strategy is to maximize profits through leveraged investment. Seungkyu Mo, a researcher at Shinhan Investment Corp., said, “For developed country bonds, compared to short-term bonds that have deviated significantly from the long-term average, the potential for further strength in long-term bonds is relatively limited, so a preference for short-term bonds is maintained in the long term.”

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