Bond ETFs soak up $3 bn this year amid heightened interest volatility

[Photo by MK DB]

Individual investors in South Korea have poured more than 4 trillion won ($3.01 billion) into domestic bond exchange-traded funds (ETFs) this year, showing their enthusiasm in bonds has not abated.

According to market tracker FnGuide on Thursday, the amount of domestic bond-type ETFs totaled 17.3 trillion won as of Wednesday, which is an increase of about 4.03 trillion won from the beginning of the year. This is in stark contrast to the situation where the size of domestic stock ETFs fell to 34.92 trillion won from 35.02 trillion won during the same period.

The size of domestic bond ETFs has increased by about 64 percent from the previous year and more than doubled from two years ago.

In terms of returns, bond ETFs outperformed stock peers. As of Wednesday, the one-year return of domestic bond ETFs was 3.30 percent, while the figure for domestic stock ETFs was 0.93 percent. The two-year return was 1.64 percent and minus 12.49 percent, respectively, showing a far larger gap.

As the stock market was sluggish last year, retail investors jumped into what had been the domain of institutional investors and the savvy industry made fixed-income investment more accessible with a range of bond ETFs.

Basically, bond ETFs make profits from the interest generated by the bonds in the portfolio and the profit from an increase in bond prices when interest rates decline.

The volatile interest rate, especially since the start of this year, has attracted large inflows of money from retail investors amid speculation that global monetary policy will ease and interest rates will fall further.

The three-year treasury bond yield was near 3.80 percent per annum at the start of the year, but quickly fell to around 3.20 percent in early February, then rose above 3.80 percent in early March before slipping again to the low 3 percent range this month.