Korean retail investors eye long-term U.S. bond ETFs for profit

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South Korean retail investors are flocking to bond exchange-traded funds (ETFs), particularly U.S. long-term ETFs, as they believe that bond prices are undervalued amid the high interest rate environment.

According to the Korea Exchange on Sunday, the most popular bond ETF net purchased by individual investors this year as of September 8 was Korea Investment Management Co.’s ACE U.S. Long Term T-Bond Active ETF H.

They net bought 167.8 billion won ($125.5 million) worth of the ETF during the cited period, resulting in net assets reaching 309.1 billion won.

Samsung Asset Management Co.’s KODEX Ultra T-bond Futures H ETF followed, with purchases worth 149.0 billion won, and KB Asset Management Co.’s KBSTAR 30-Years Treasury Bond Enhanced ETF Fund worth 110.0 billion won.

Long-term bond investment often provides higher returns compared to that in short-term bonds during periods of interest rate cuts, as long-term bond prices are sensitive to interest rate fluctuations.

The most net-purchased ETF product among individuals, ACE U.S. Long Term T-Bond Active ETF, is believed to have gained popularity by offering distribution yields in the 3 percent range.

Korean retail investors have also been buying long-term bond ETFs listed on the U.S. stock market.

According to data from the Korea Securities Depository, local investors have net purchased a total of $1.62 billion worth of U.S. long-term bond-related ETFs from foreign markets this year.

Among them, Direxion Daily 20 Year Plus Treasury Bull 3x Shares TMF, a leveraged product that tracks three times the yield of long-term bonds, had the highest net purchase amount at $886.33 million, topping the list among all listed items.

Following closely were iShares 20 Year US Treasury Bond JPY Hedged ETF, iShares 20+ Year Treasury Bond ETF Fund, and iShares 20+ Year Treasury Bond BuyWrite Strategy ETF.

The popularity of these products is likely backed by the perception among individual investors that the interest rate hikes by the U.S. Federal Reserve are coming to an end and that long-term bond prices are currently near their lows.

However, it is believed that many investors have recorded losses as they made their investment decisions based on the belief that bond prices had hit the bottom.

The yields of the target maturity fund product with a three-times leverage on U.S. long-term bonds stood at a negative 22.97 percent this year.

As government bond yields are fundamentally a bet on interest rate movements, investors are also flocking to funds that directly invest in interest rates.

According to local financial data tracker FnGuide, Mirae Asset Global Investments Co.’s TIGER CD Rate Investment Synth ETF Fund attracted a net inflow of 2.76 trillion won in new investments this year.

The net asset value has rapidly grown to 5.72 trillion won, narrowing the gap with the ETF market leader KODEX 200 ETF to within 300 billion won.

Mirae Asset’s TIGER Synth-KOFR Active ETF also increased its net assets to over 2 trillion won, with a 1.61 trillion won increase in the initial investment.

The individual provision in the money market funds (MMFs) also exceeded 15 trillion won, recording its largest amount in about nine months since the end of November last year when the figure stood at 15.07 trillion won.

MMFs invest in short-term financial products, such as negotiable certificates of deposit, commercial papers, and bonds with maturities of less than one year.

With recent fluctuations in the stock market and consequential difficulties in finding stable investment options, the easy liquidation of interest income makes them an attractive investment destination.