Expectations for Economic Recovery... Seohak Gaemi Invests in High-Yield Bond ETFs

Most Purchased Overseas Stocks
3 Out of 10 Are High-Yield Bonds

[Asia Economy Reporter Minji Lee] The group of foreign investors known as Seohak Gaemi, who anticipated a faster economic recovery thanks to large-scale fiscal stimulus measures in various countries, has been focusing on high-yield overseas bond ETFs since the beginning of this month. High-yield bonds can pursue high returns as bond prices rise due to reduced credit risk during the economic recovery phase.

According to the Korea Securities Depository's SaveRO system on the 21st, among the top 10 most purchased overseas listed stocks by domestic investors up to the previous day this month, three were exchange-traded funds (ETFs) investing in high-yield bonds. The most purchased stock was the ‘ISHRS CRE BD ETF (ISTB)’, iShares Core 1-5 Year USD Bond ETF, with net purchases worth 42.7 billion KRW. Following that, the ‘ISHARES IBOXX HIGH YLD CORP ETF (HYG)’, iShares High Yield Corporate Bond ETF, and the ‘VANGUARD INTTERM CORPORATE ETF (VCIT)’, Vanguard Intermediate Corporate Bond ETF, were bought with net purchases of 37.1 billion KRW and 34 billion KRW respectively. The net purchase volume of these stocks exceeded that of Apple (32.8 billion KRW), Microsoft (28.4 billion KRW), PayPal (23.7 billion KRW), which Seohak Gaemi had focused on buying after the index plunge caused by the COVID-19 pandemic last year, as well as Invesco QQQ S1 (30.2 billion KRW), which tracks the Nasdaq 100 index.

Jinyoung Kim, a researcher at Kiwoom Securities, explained, "Amid expectations of economic recovery, funds continue to flow into U.S. high-yield corporate bonds and short-term bond ETFs," adding, "In the past week alone, funds flowing into U.S. high-yield corporate bonds and short-term investment-grade bonds have each exceeded 1 trillion KRW."

‘ISTB’ is an ETF composed of short-term investment-grade bonds with maturities between 1 and 5 years, high-yield bonds, and emerging market U.S. dollar-denominated bonds, typically generating profits of 2-3%. ‘HYG’ is a product that holds high-yield bonds issued by financially distressed U.S. companies with high interest rates, aiming to generate high interest income; it pays dividends monthly, with an average annual dividend yield reaching the 5% range. ‘VCIT’ is an ETF composed of intermediate-term corporate bonds with maturities between 5 and 10 years, pursuing stable returns in the 2% range.

High-yield corporate bonds refer to bonds issued by non-investment grade companies rated BB or below. High-yield bonds experience significant price drops when external environments change rapidly, such as during the COVID-19 crisis last year, due to increased credit risk. However, when the economy enters a recovery phase, credit risk significantly decreases, causing prices to rise and enabling pursuit of high returns. Recently, following the U.S. Biden administration’s announcement of a $1.9 trillion economic stimulus package and a subsequent $2 trillion infrastructure investment plan, the economic recovery cycle is expected to accelerate. According to U.S. credit rating agency S&P, as of March, the default rate of U.S. high-yield companies fell to 3.15%, the lowest level in 10 months.

A representative of an asset management company said, “COVID-19 vaccinations are progressing rapidly, and governments are actively providing fiscal support based on lessons learned from the 2008 Lehman crisis,” adding, “Compared to the usual scale (about 20 trillion KRW), the amount of bonds downgraded to non-investment grade last year reached 240 trillion KRW, so the number of companies able to recover creditworthiness during the economic recovery phase will increase.”