Individuals, foreigners differ in ETF focuses

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Individual and foreign investors have shown mixed investing patterns in the South Korean exchange-traded fund (ETF) market this year. While individuals focused on domestic secondary batteries and U.S. dividend ETFs, foreigners increased their investments in U.S. technology stocks and Chinese electric vehicles (EVs), which have seen a marked decline in 2023 to date.

According to data from the Korea Exchange on Monday, retail investors’ net purchase in the KODEX KOSDAQ 150 Futures Inverse ETF, which inversely tracks the Kosdaq 150 Index, was 707 billion won ($535.81 million) as of September 1, 2023. It is the largest investment among listed ETFs, followed by that in TIGER Secondary Battery Materials Fn ETF, which invests in domestic secondary battery stocks, at 603.4 billion won.

Notably, retail and foreign investors have focused on varied sectors and themes. Individuals, for example, have been net sellers of ETFs covering U.S. tech stocks such as Apple Inc. and Nvidia Corp. this year, while foreigners have been active buyers of U.S. tech ETFs. Even in the secondary battery theme, individuals have invested in domestic secondary battery companies while foreigners have been betting on Chinese secondary battery and EV companies.

Foreign investors have net bought the INDXX US TECH TOP 10 Index, which offers exposure to the top 10 U.S. tech stocks and worth 352 billion won so far this year, while retail investors have net sold 280 billion won over the same period.

Individuals have instead net purchased the SOL US Dividend Equity ETF, which offers steady monthly dividends while tracking the Dow Jones U.S. Dividend 100 Price Return Index, worth 183 billion won this year and the largest investment among U.S. equity ETFs. The buying spree has recently pushed the total net asset of the ETF, listed last November, to the 280 billion won level. Analysts note that the steady inflow of installment investment funds using pension accounts also contributed to the increase.

“It is a product with potential for steady dividend growth with an annual dividend yield in the 3 percent range and a 14 percent average dividend increase over the past five years,” according to Kim Jung-hyun, head of the ETF division at Shinhan Asset Management Co. “The monthly dividend strategy struck a chord as people are more inclined to prepare for their retirement through active management of private pensions.”

Meanwhile, individuals have been focusing on domestic secondary battery stocks when foreigners have increased their investments in China’s secondary battery sector despite a sharp decline this year. Foreigners were net buyers of the flagship TIGER China Electric Vehicle Solactive ETF, worth more than 510 billion won and even exceeding blue-chip stocks such as Hyundai Mobis Co. at 499.8 billion won and Samsung Life Insurance Co. at 426.7 billion won.

The ETF includes leading stocks related to Chinese EV and secondary batteries, such as BYD Co. and Contemporary Amperex Technology Co (CATL). The product has been performing well despite its price falling more than 20 percent since the beginning of the year due to the sluggish Chinese stock market.

“China’s EV exports surged 115 percent from a year ago to 790,000 units in the first half of this year,” Eugene Investment & Securities Co. analyst Han Byung-hwa said. “U.S. EV giant Tesla Inc. is increasingly reliant on Chinese batteries, and partnerships between Chinese EV companies and European companies are also blooming.”

Another noteworthy trend is individuals rapidly increasing their investments in fixed-income ETFs, which offer more stable returns than equities in the ETF market, with two fixed-income ETFs making the top five ETFs by net purchases from individuals this year. Retail investors have particularly been leaning toward long-term bonds, investing more than 300 billion won in the top two 30-year U.S. Treasury bond ETFs on the belief that U.S. interest rates have neared a peak, according to analysts.