Long-Term Bond ETFs Flood Market... First Half of the Year Is the Buying Opportunity

Investing at the Upper Band of 3-Month Bond Yields
Using Asset Allocation Strategies Rather Than Aggressive Betting

[Asia Economy Reporter Park So-yeon] As expectations arise that interest rates have passed their peak and will stabilize, major asset management companies have been launching long-term bond exchange-traded funds (ETFs) one after another. Interest rates and bond prices move inversely. Long-term bonds, which have experienced significant price declines, can yield higher returns during periods of falling interest rates, attracting investors.

According to the financial investment industry on the 7th, Hanwha Investment & Trust Management will list the US 30-Year Treasury Futures Leveraged (Synthetic H) ETF on the KOSPI market that day. The ACE US 30-Year Treasury Futures Leveraged (Synthetic H) ETF is a product based on the 'S&P Ultra T-Bond Futures (Excess Return)' index. The index includes US 30-year Treasury futures listed on the Chicago Board of Trade (CBOT). The underlying assets of these futures are US Treasury bonds issued by the US Department of the Treasury with remaining maturities of 25 to 30 years. The index tracks the daily returns at twice the rate.

On the same day, Hanwha Asset Management will also list the ARIRANG 30-Year Treasury Active ETF. The benchmark index is the Korea Asset Pricing (KAP) 30-Year Treasury Index (TR). It tracks the KAP 30-Year Treasury Index and allocates 80% to on-market 30-year Treasury benchmark bonds. Mirae Asset Global Investments also listed the 'TIGER 30-Year Treasury Strip Active' ETF earlier this month. Strip bonds differ from regular bonds in that the rights to receive principal and interest are issued separately. Constructing an ETF with strip bonds can relatively extend the average maturity of the bonds. Currently, the average maturity of 30-year bond ETFs listed domestically is around 20 years, but the average maturity of the 'TIGER 30-Year Treasury Strip Active' is 28 years. All else equal, the longer the maturity of bonds held by an ETF, the greater the price volatility in response to interest rate changes.

The surge in bond ETFs this month is due to increased demand. According to financial information provider FnGuide, as of the end of January, the net asset value of bond-type ETFs listed in the domestic market increased by 58.51% over the past year to 15.6028 trillion KRW. Consequently, the proportion of bond-type ETFs within the entire ETF market grew from 14.06% to 18%.

Nam Yong-su, head of ETF management at Korea Investment Trust Management, said, "As scenarios for interest rate cuts in the second half of this year gradually emerge, demand for long-term government bonds is increasing. Since US long-term bonds are a core product for asset allocation, there is significant potential for use. We plan to launch additional long-term government bond ETFs that can be invested in 100% not only through general accounts but also retirement pension accounts."

In the case of ultra-long-term bond ETFs, price volatility increases with interest rate fluctuations, so profits tend to be relatively higher when interest rates fall. Conversely, if the benchmark interest rate rises beyond market expectations, significant losses may occur. Experts believe that historically, the benchmark interest rate is relatively high and, given the possibility of an economic recession, current rates are close to the upper limit.

Kim Do-hyung, team leader of ETF consulting at Samsung Asset Management, explained, "In a situation where bond interest rate volatility is increasing, it is effective to consider the upper band of the recent three-month interest rate range for each bond as a buying timing." He added, "Bonds are assets intended to generate interest income with relatively lower volatility than stocks, so it is important to use them as a tool for asset allocation strategies rather than making reckless bets."

Kim Jung-hyun, head of the ETF management center at Shinhan Asset Management, advised, "With growing expectations that interest rates may be cut within the year, long-term bonds are attractive to investors seeking a more aggressive position. Since the prevailing opinion is that interest rate levels will be lower in the second half of the year, if investing based on this outlook, it is better to invest in the first half rather than the second half."

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