[Practical Finance] Bond ETFs Viewed from the End of High Interest Rates

Bond-type ETF Size Doubles in One Year
Products Targeting Profits from Interest Rate Cuts
"Various Products Emerging" Popularity Expected to Continue

Editor's NoteIt has already been about a month since the New Year 2024 began. Experts find it difficult to easily predict this year's market due to ongoing inflation, geopolitical crises in the Middle East and Ukraine, continuing US-China conflicts, and the US presidential election in November. Although the environment remains challenging, interest in new investment destinations does not fade. If you are considering portfolio diversification, take a look at exchange-traded funds (ETFs) investing in infrastructure, bonds, and more.

Among the ETFs that gained the most popularity in the market last year, bond-type ETFs stood out. Expectations that the US benchmark interest rate would be lowered starting this year influenced this trend. Additionally, the advantage of relatively stable investment compared to stocks has attracted investor demand.

According to FnGuide on the 23rd, as of the previous day, the total net assets of domestic and international bond-type ETFs amounted to 24.9935 trillion KRW, a 99.03% increase compared to one year ago (12.5574 trillion KRW). It has also steadily increased compared to the beginning of the year at 24.3058 trillion KRW.

The reason bond-type ETFs are attracting attention is closely related to high interest rates. The expectation that the US Federal Reserve's (Fed) benchmark interest rate hike trend will shift to cuts starting this year appears to have led to increased demand for bond-type ETFs. When the US lowers its benchmark interest rate, domestic benchmark rates usually follow suit. This causes bond prices to rise. Buying bond-type ETFs when bond prices are low allows investors to potentially profit when bond prices increase later.

Lee Su-jin, head of the ETF product team at KB Asset Management, explained, "There has been an increase in proactive directional investments aiming to benefit from bond price rises due to interest rate declines," adding, "This is because alternative products such as interest rate-type and maturity bond-type ETFs have emerged to pursue excess returns compared to fixed deposits amid the high-interest-rate environment, satisfying diversified investment demand."

The advantages of bond-type ETFs include diversified portfolio risk, improved accessibility to bond investments, and lower fees compared to direct bond investments. A representative from Korea Investment Management stated, "The reason bond-type ETFs are gaining attention is believed to be due to increased interest in interest income amid a higher interest rate environment than in previous years," and added, "Various product developments are underway in the industry, building a product lineup that can be considered from diverse investment perspectives beyond just pursuing interest income."

In fact, recently asset management companies have been expanding investors' choices by introducing various bond-type ETFs. Korea Investment Management launched three maturity auto-extension bond-type ETFs. These are of the same type as the 'ACE November Maturity Auto-Extension Corporate Bond AA-Active ETF' introduced in December last year. Through this product, investors can select ETFs that include bonds maturing at desired times each quarter.

KB Asset Management also released the 'KBSTAR US Treasury 30-Year JPY Exposure ETF,' which simultaneously invests in US long-term bonds and Japanese yen. It is the first domestic ETF to pursue capital gains from investing in 30-year US Treasury bonds and foreign exchange gains from yen value fluctuations. Additionally, they introduced the 'KBSTAR US Treasury 30-Year Covered Call ETF,' which invests in US long-term bonds to pursue stable monthly dividends.

Shinhan Asset Management also launched the 'SOL Treasury Bond 30-Year Active' ETF. This product has a total expense ratio of 0.05% per year, the lowest among domestic long-term bond ETFs. Another strength is that it is classified as a safe asset in retirement pension accounts, allowing investment of up to 100% of accumulated funds. Furthermore, Mirae Asset Management introduced previously unavailable types of ETFs such as the TIGER CD Interest Rate Investment (Synthetic) ETF and TIGER US Treasury 30-Year Strip Active (Synthetic) ETF. With the emergence of various ETFs, investors' options are expanding.

Jung Seung-ho, head of the FICC ETF Management Team 2 at Mirae Asset Management, said, "The advantages of bond-type ETFs include relatively low volatility and stable returns," explaining, "Compared to stocks, they have lower volatility and less risk of loss, and they generate stable interest income." He added, "However, since bond prices tend to fall when market interest rates rise, it is difficult to defend against losses during periods of monetary tightening by the Fed or rising interest rates."

However, there are precautions when trading bond-type ETFs. Jung Seung-ho emphasized, "It is necessary to be aware that bond-type ETFs have significant volatility differences depending on the maturity of the included bonds," noting, "Volatility tends to increase as the maturity of the included bonds extends from short to long term."

The growth of bond-type ETFs is expected to continue. As economic uncertainty expands and interest rate stabilization with downward trends is anticipated, the advantage of stable investment is likely to persist. Lee Su-jin said, "The bond-type ETF market, which can pursue relatively stable returns, is expected to see increased diversity and growth with the continuous emergence of solution products tailored to various investment needs and market conditions," adding, "After a one-time drop in interest rate levels, various strategies such as covered calls and yen exposure are being incorporated to enhance stability and profitability."

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