Foreign Investors Buying Leveraged ETFs: A Comeback to the Korean Stock Market?

KODEX Leverage Tops Foreign Investors' Buys This Week

Net Buying Also Seen in KODEX KOSDAQ150 Leverage

"Market Response Should Vary With Exchange Rate, Oil Prices, and Interest Rates"

Recently, expectations for foreign investors’ return to the domestic stock market have been rising, as they made significant net purchases of leveraged Exchange-Traded Funds (ETFs) that bet on the rise of Korean equities over the past week.

According to ETF Check on March 13, from March 4 to March 11, the ETF most purchased by foreign investors was KODEX Leverage, with a net purchase of 87.8 billion won during the week. This was followed by KODEX KOSDAQ150 Leverage, with a net purchase of 53.3 billion won, TIGER Leverage with 41.5 billion won, and TIGER KOSDAQ150 Leverage with 16 billion won, all ranking among the top ETFs in terms of net buying.

Leveraged ETFs allow investors to earn twice the return when the underlying index rises. Therefore, the net buying of leveraged ETFs is interpreted as a sign that investors are anticipating an upward trend in the index.

Foreign investors have been net sellers in the Korean stock market so far this year. In January, they only managed a net purchase of 11.85 billion won in the KOSPI market, but in February, they sold as much as 2.1 trillion won. This month as well, they have recorded net selling of over 1.1 trillion won. The fact that foreign investors, who posted record net selling last month and continue to sell this month, are now buying leveraged ETFs is fueling optimism for their return to the Korean stock market.

The ongoing record net selling by foreign investors in the Korean stock market is due to several reasons: the impact of exchange rates such as the weakening of the won, profit-taking and valuation burdens, and risks related to the Middle East. As the exchange rate has risen to the mid-to-high 1,400 won range, concerns about foreign exchange losses among foreign investors have grown. In addition, foreign investors who had previously bought large amounts of semiconductor stocks have begun to take profits as the domestic stock market, especially the semiconductor sector, has seen substantial gains this year. Persistent uncertainty regarding U.S. interest rate cuts is also putting pressure on capital outflows. Furthermore, the recent escalation of conflicts in the Middle East has strengthened the preference for safe-haven assets, leading to additional outflows of foreign capital.

Given that the factors behind the foreign sell-off have yet to be fully resolved, it is unlikely that foreign investors will return to the market in the short term. The war in the Middle East is still ongoing, and the conflict is expected to continue to have a negative impact on both exchange rates and interest rates.

Noh Donggil, a researcher at Shinhan Investment Corp., said, "If the foreign exchange market and the U.S. bond market are unstable, foreign investors may reduce their positions regardless of price," adding, "In particular, whether the won-dollar exchange rate, which is hovering around the 1,480 won level, will remain at this level or fall gradually will affect foreign investors' supply and demand in both the futures and spot markets." He further explained, "Since there is no clear answer within the stock market itself at the moment, investors should monitor oil prices and exchange rates to respond appropriately to the market."

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