ETFs emerge as alternative amid ongoing bear market

Hong Min-ki, 36, lost 30 million won ($21,786) in the stock market last year.

The stocks he handpicked all plunged. The mutual funds in his portfolio also ended up betraying his trust.

“The situation is that I need to do something to regain some of the losses, but now I am afraid that I’ve lost a sense of which stocks or funds I should pick,” Hong said.

To Jung Sang-won, a 35-year-old worker at a local company, a bank deposit was the only means of investment until recently.

He is now thinking of buying some stocks after hearing someone near him say it is time to get into long-term stock investments as the stock market has already plunged considerably.

His problem is that he also has no confidence in his stock selections.

More and more people like Hong and Jung are turning to exchange-traded funds, or ETFs.

Designed to track a certain stock index, an ETF can be bought and sold at any time during the trading day in contrast to a normal mutual fund, which can only be sold after the market closes.

Most of the ETFs available locally are linked to the Kospi 200 index, which is comprised of 200 big market cap players.

Some ETFs track certain industries or overseas stock indices. But, many experts agree that the Kospi 200 ETF is the most stable product in terms of returns.

Analysts say at a time when the stock market is sluggish, such as it is these days, diversification is a key to investment.

It is anybody’s guess which company will be the next to be hit by the crisis, they say.

Some troubled companies can see their stock prices fall well below market average or even have their stocks delisted.

Investment in funds is also risky as fund managers can make the wrong choices in their portfolios.

Buying various stocks will be the best strategy for diversified stock investments, but it takes a huge amount of money for retail investors to do so.

With limited budgets, they cannot buy all the major items and thus cannot expect the best outcomes.

The purchase of Kospi 200 ETFs solves the problem, according to analysts. Buying one ETF is the equivalent of buying 200 stocks.

A cheap commission is another merit of the ETF.

Equity fund investors have 2 to 3 percent slashed off their investments every year in commission to the funds’ sellers and managers.

Index funds, which function similarly to ETFs but are not listed, also require around half of the commission that an investor in an equity fund pays.

But, ETFs require less than 1 percent in commission. For the Kospi 200 ETF, it is less than 0.5 percent. It looks like a very small sum, but if the investment is in the long term, it accumulates to huge amounts.

On top of that, ETFs are exempt from trade taxes.

That is why Barclays Global investors, an investment management subsidiary of U.K.-based Barclays Bank, called ETFs one of the most innovative financial products sold in the market over the past 20 years.

Not many retail investors know about the product, however, as banks or brokerages hardly recommend them.

The Korea Exchange, the local bourse operator, said in a book it published last year that “the ETF is a good product for investors rather than for financial companies.

“Financial institutions don’t recommend it as they don’t make much money out of it.”

There were a total of 38 ETFs in the local market as of yesterday.

One follows the KRX 100, comprised of 100 quality stocks from both the Kospi and Kosdaq. Some follow only certain business groups such as Samsung and Hyundai.

By Kim Sun-ha JoongAng Ilbo [joe@joongang.co.kr]