Investors put a lot of stock in exchange-traded funds

As investors search for highly-profitable financial products in a sluggish economy, exchange-traded funds (ETFs) are gaining popularity in the Korean capital market, following the trend seen in developed countries. ETFs are investment funds traded on exchanges, much like stocks, and they have quickly come to dominate the local fund market as they offer consumers low fees and fewer restrictions.

In the third quarter this year, the local stock market was strong, with the benchmark Kospi surpassing the 2,000 mark in mid-September for the first time in three months. The market was boosted mainly by foreign investors who maintained a buying spree. In the July to September period alone, the index jumped 7.17 percent.

A fund assessment conducted by the JoongAng Ilbo and assessment company Zeroin showed that among investment products offered in the local financial market, ETFs performed well, reaping strong profits.

ETFs recorded the highest profitability of any investment funds in the third quarter, according to the assessment. Of 13 equity funds that yielded returns of more than 15 percent, eight were ETFs. Among those funds, ETFs that invest in stocks of companies in sectors like shipbuilding, automobiles, chemicals and banking ranked high in terms of profitability.

Funds investing in Samsung Kodex Shipbuilding topped the list with a return of 31.35 percent, followed by Hanwha Arirang Shipbuilding at 25.97 percent and Mirae Asset Tiger Hyundai Motor at 17.03 percent.

Many investors in indirect financial products are shifting to ETFs.

This year, the net inflow of investment in the fund market as of the third quarter, excluding ETFs, were estimated to be roughly 1.3 trillion won ($1.2 billion). Investment in ETFs amounted to nearly 3.4 trillion won.

Even when stretching the time frame to 12 months ago, the net inflow of investment in funds amounted to 400 billion won, whereas it was 4.4 trillion won for ETFs.

More and more Korean investors are rushing to purchase ETFs because the structural limit on funds is revealing.

Active funds, an aggressive investment designed to outperform the market by picking high-yield stocks, are no longer performing well and are therefore losing their appeal. This is particularly because stock markets have become less volatile as the global economy continues to struggle with low growth. Fewer companies are seeing their stock value shoot up as it did when the economy thrived.

In the third quarter alone, the Seoul primary market index - the Kospi - saw a 7.17 percent. The yield on the index fund was 7.81 percent, while the average for equity funds was 5.48 percent.

Furthermore, while the Kospi index rose 12.84 percent compared to two years ago and the yield on the index fund grew 15.35 percent, equity funds’ yield grew 7.75 percent.

This is where the ETF comes in. The ETF is an investment that has the strength of an index fund but costs less. It is also easier to trade than index funds.

“Active funds are somewhat weak in structure, where the funds themselves determine profitability. It fluctuates in profitability as assets come in and out of the funds,” said Nam Gil-nam, a researcher at Korea Capital Market Institute. “Assets leaning toward ETFs will further accelerate.”

What would be the best way to invest in ETFs? Korean ETF market No.1 Samsung Asset Management and Mirae Asset Global Investments made somewhat conflicting suggestions.

“As seen in the JoongAng Ilbo’s Q3 assessment, you would yield higher than the market average with industry ETFs if you invest based on experts’ forecasts on each industry. They’re also stable,” said Yun Joo-young, head of the ETF division at Mirae Asset.

Yoon, however, suggested that investors leaning toward leveraged and inverse ETFs may have trouble.

“You shouldn’t hold onto your derivatives ETFs for longer than a month,” said Yoon. “For funds, you can recover losses by holding them. However, leveraged ETFs accrue extra charges when you do the same.”

On the other hand, Samsung Asset Management ETF director Bae Jae-kyu said investors should follow market indexes faithfully.

“It is dangerous for individual investors to buy certain industry ETFs. They lack the information and ability to analyze the market,” said Bae. “I would recommend investing stably by buying and selling index-based ETFs.”

The yield from investing in the Japanese stock market has also turned. In the first half of the year, the yield on overseas funds investing in Japan (27.16 percent) outstripped that of China (minus 8.2 percent). However, in the third quarter, the tables have turned with Japan at 5.72 percent and China at 9.38 percent.

In Korea, small and medium cap equity funds yielded only 5.48 percent, lower than the average of stock funds in the third quarter.

BY YOON CHANG-HEE AND JEONG SEON-EON [jiyoon.kim@joongang.co.kr]