Korean retail investors continue to invest in U.S. ETFs despite loss concerns

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South Korean individual investors are continuously flocking to U.S. exchange-traded funds (ETFs) despite growing concerns over losses on bond investments amid rising Treasury bond yields.

According to data from the Korea Securities Depository on Thursday, Korean retail investors net purchased four U.S. long-term bond-related ETFs worth $1.58 billion in overseas stock markets this year.

They bought $874.7 million worth of the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF), a leveraged product that tracks 300 percent of long-term bond yields, which topped the list of net purchases among retail investors, including individual stocks.

Analysts note that the rise was driven by investors going after capital gains on expectations that the U.S. Federal Reserve (Fed) will end its interest rate hikes by the year-end and rates will eventually draw a downward curve.

Of long-term bonds sensitive to interest rates, the most purchased were target maturity funds (TMFs), leveraged ETFs that can take advantage of higher volatility.

However, concerns rise over losses as long-term U.S. Treasury yields have risen sharply amid concerns over further rate hikes on strong U.S. economic indicators. According to the Wall Street Journal, the 10-year U.S. Treasury yield hit a 15-year high of 4.26 percent on Wednesday, local time.

With interest rates surging again, the return of a TMF for a 3x leveraged ETF has dropped 22.7 percent from the beginning of the year. A U.S. long-term bond ETF, which invests in the Japanese yen, has also been hit by rising rates and a depreciating yen, with its return falling 13.16 percent this year.

Other ETFs, TLTW and TLT, also delivered negative returns of minus 6.29 percent and minus 5.75 percent, respectively.

While retail investors continue to average down in anticipation of the Fed’s rate cut, there are concerns that they can take further losses if rates rise again or remain at a similar level.

Yet, some experts advise purchasing government bonds as a long-term investment as bonds become more attractive than stocks.

“The high interest rate environment is likely to weigh on earnings per share (EPS), and the stock value has reached over the top following a continuous surge,” said Park Yoon-cheol, an analyst at Hi-Investment & Securities Co. “It is undeniable that bonds are increasingly more appealing than stocks, and long-term government bond prices are currently at an accessible level.”