ETFs sought to deal with turbulence in market

Local investors are adapting to turbulence in the market by engaging in more indirect investments in prime real estate and short-term investments in exchange-traded funds (ETFs).

According to the Korea Exchange, Korea’s average daily trading volume in ETFs stood at $711 million last year. This was the highest figure in Asia and the fourth-largest worldwide, trailing only the U.S., Germany and the U.K., according to the bourse operator.

ETF trading has soared in popularity here due to the increase in short-term, speculative investments by retail investors attempting to profit from the pendulum swings witnessed in capital markets last year.

ETFs are investment vehicles that are either tied to an index such as the Kospi 200, a commodity such as gold, or a basketful of assets, but are traded on regular exchanges much like stocks.

Leveraged ETFs are designed to double the movement of the index, so when the index drops unexpectedly, the investor loses roughly twice their principal, while inverse ETFs are designed to bet against the movement of the index, profiting when the index falls.

“Among all funds, ETFs are more suitable for short-term investments as they cost less to buy and sell,” said Bae Sung-jin, an analyst at Hyundai Securities. “Retail investors will continue to ride the movement of the market through leveraged ETFs or inverse ETFs, which will increase market volatility.”

Meanwhile, the total amount of Korea’s real estate investment funds has nearly doubled in the past three years as deep-pocketed investors have sought safer assets amid a continuing low-growth economic trend, according to data by the Korea Finance Investment Association (Kofia).

The combined amount of public and private sector money that has been poured into local real estate funds reached 13.2 trillion won ($11.4 billion) as of last Thursday, compared with 7 trillion won tallied in September 2008.

The total investment figure grew to 11 trillion won at the end of 2010 and rose by another 1 trillion won last July, Kofia said.

Private equity funds (PEFs) made up the majority, or 97.5 percent, of the domestic market for real estate funds.

They raise such large amounts through a small number of exclusive institutional investors rather than individuals, allowing them to pool enough funds to invest in prime real estate such as profitable office buildings in the central district areas of Seoul, according to Kofia.

Experts said the real estate fund market will likely expand further, as these private funds are skilled in hedging against risks and good at reaping profits amid high financial market volatility.

By Lee Jung-yoon, Yonhap [joyce@joongang.co.kr]