“When I died, I told my wife to invest 10% of my fortune in US Treasury bonds and 90% in Vanguard’s S&P500 ETF.”
Warren Buffett, “Sage of Omaha,” said in an interview with CNBC in 2019. Regarded as one of the best investors in history, Buffett’s words show that ETFs are such a reliable investment vehicle. In particular, public offerings and private equity funds are becoming a powerful investment vehicle in the Korean market, where both are in crisis.
Already, high-income owners are moving in that direction. As a result of analyzing the portfolios of high-income investors who entrusted more than 1 billion won to three domestic securities companies (Mirae Asset Securities, Samsung Securities, and NH Investment & Securities), the Korea Economic Daily reported that their ETFs amounted to 763 billion won. It surged 110.42% from the end of 2019 (362.6 billion won) before individual investors poured into the stock market. Their buy orders by the end of February amounted to 9,737 trillion won. It is nearly twice the amount of purchases in 2018 (5,5991 billion won).
From a single transaction to an investment product
It is analyzed that the investment of high-value asset owners in ETFs is shifting from short-term arbitrage products to theme-type and asset allocation-type products. Until last year, the most aggressive ETFs they bought were leveraged and inverse ETFs. Inverse and leveraged products accounted for all the top five domestic ETF purchases last year. These ETFs are mainly used to buy and sell short periods of time to bet on the fluctuations of the stock market or to make profits by investing in two products with different characteristics at the same time.
Changes are spotted this year. Theme-type ETFs and industry ETFs that diversify investments in companies belonging to a specific investment theme have entered the top ranks. As long-term investment products entered the portfolio, which used to be one of the short-term investment products, the balance of ETF holdings also surged. Among domestic products, Mirae Asset Asset Management’s’Tiger KRX Rechargeable Battery K-New Deal’ ETF, which invests in Korean companies belonging to the secondary battery value chain, ranked fourth. Overseas ETF investors placed the third largest buy order in State Street Global Advisors’ Energy Select Sector SDPR (tick name XLE). In the course of a surge in international oil prices this year, the energy industry has emerged as a beneficiary industry, and the stock price of XLE has risen 32.53% compared to the beginning of the year.
The ETF of Arc Investment, led by Cash Wood, which has been a hot topic in the global market, was also chosen by the rich. Rather than simply following the index, Arc Investment sells’active ETFs’ in which the fund manager directly trades the stock. ‘ARK Innovation’ (ARKK), the largest of Arc ETFs, ranked 4th in overseas ETFs that were most bought by asset prices. ARKK earned 152% last year and was the fourth highest among all ETFs in the U.S. excluding leveraged products.
Advantages of ETFs? It’s easy, but the yield is excellent.
The reason ETFs are so popular with asset owners is their low fees and transparency. It is explained that asset prices have turned to ETFs as active funds, which used to be the mainstream of indirect investment products in the past, outperformed the market index. According to F&Guide, a fund valuation company, the average return of 541 active equity-type funds in Korea over the past year was 82.9%. This is less than the increase rate of the KOSPI index (84.7%) during the same period. The attractiveness of ETFs is even greater when considering the high fees of active funds compared to the average remuneration of ETFs in the range of 0.3% per year.
Transparency is also an advantage of ETFs. ETFs organize their portfolios according to pre-set principles, track changes in this portfolio, and reflect them in the fund price in real time. Even if an active fund investor places a redemption order, it is evaluated that investors have a high preference in terms of transparency, compared to the fact that they do not know the price of the redemption rather than the composition of the fund at that time.
Lee Hyun-seung, CEO of KB Asset Management, said, “ETF has evolved into a means that allows individual investors to construct difficult investment strategies and themes beyond simply following the rate of return of the entire market.” “In a situation where public offering funds declined and the trust of private equity funds declined significantly, targeting investors through differentiated ETF strategies will determine the success or failure of the asset management industry.”
Reporter Jeon Beomjin [email protected]