Interest-rate ETFs attract $770 mn in one month in Korea

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Investors are flocking to interest-rate tracking exchange traded funds (ETFs) that offer stable interest income amid growing uncertainty in the South Korean stock market with the benchmark index losing steam.

According to fund evaluator FnGuide Inc. on Monday, more than 1 trillion won ($770 million) was set aside for interest-rate ETFs that track certificate of deposit (CD) rates and the Korea Overnight Financing Repo Rate (KOFR), the country’s risk-free reference rate, over the past month from June 12 to July 10.

The TIGER CD Interest Rate Investment KIS Special Asset (Synthetic) ETF increased by 440.2 billion won, bringing its total net assets to 4.99 trillion won.

This is the first interest-rate ETF that tracks the 91-day CD yield released daily by the Korea Financial Investment Association (KOFIA) and is expected to yield 3.75 percent per annum as of July 7.

The fund, which had net assets of some 250 billion won at the end of 2021, grew to 3.2 trillion won last year alone as CD rates rose steeply.

In addition, the TIGER KOFR Interest Rate Active (278.4 billion won), Heroes CD Interest Rate Active (201.2 billion won), and the KODEX CD Interest Rate Active (127.4 billion won) attracted large amounts of money from retail investors.

Since the KOFR ETF invests in bonds with a maturity of one day, the investment risk is very low and interest income can be earned daily.

As of July 7, the KOFR was yielding 3.58 percent, which is higher than the interest on brokerage deposits and more convertible than bank deposits, making it a “money parking product” for short-term funds waiting to be invested.

Interest-rate ETFs are mainly used by institutional investors for asset allocation, but they are also gaining popularity among retail investors as high interest rates boost yields.

Individuals bought 17.3 billion won worth of the KODEX KOFR Interest Rate Active (Synthetic) in the last month and 13 billion won worth of the TIGER CD Interest Rate Investment KIS (Synthetic).

As the uncertainty regarding the U.S. Federal Reserve’s further interest rate hike has recently increased, the appeal of interest-rate ETFs that can earn stable interest income has become more prominent.

As a result, competition has intensified, with small and medium-sized asset managers launching various interest-rate products in addition to large firms.

As for CD interest-rate ETFs, following the TIGER CD Interest Rate Investment KIS (Synthetic) launched in July 2020, Kiwoom Asset Management and Samsung Asset Management recently launched CD Interest Rate Active (Synthetic) products.

In addition, following the success of the KODEX KOFR Interest Rate Active (Synthetic) listed in April last year, Mirae Asset Global Investments, Hanwha Asset Management, and NH-Amundi Asset Management launched KOFR ETFs one after another.