[Practical Finance] Changed Inflation Investment Formula... Avoid Inflation-Linked Bonds, The Truth of Gold

International Oil Price Volatility ↑... Higher Risk
Inflation-Linked Bonds May Be Too Late to Invest Now
'Gold Funds' Advantageous During Interest Rate Hikes

[Asia Economy Reporter Hwang Yoon-joo] The investment formula for inflation is changing. As the exchange-traded fund (ETF) market has grown significantly, more people are investing indirectly rather than directly in physical assets. Additionally, external variables such as supply chain restructuring issues and Russia's invasion of Ukraine have increased market volatility, making products aimed at short-term returns (inverse and leveraged ETFs) more likely to incur losses. Nickel, which has seen a large gap between futures and spot prices, is a representative example issuing investment caution warnings.

◇ Inflation-Linked Bond Investment: 'Not So Sure'... Just Defending Against Interest Rate Hikes = Currently, investing in Treasury Inflation-Protected Securities (TIPS) feels somewhat late. Unlike regular bonds with fixed principal and interest payments, TIPS are bonds whose principal and interest change according to inflation. When inflation rises, the bond principal and interest increase. Gong Dong-rak, head of the FICC Research Department at Daishin Securities, said, "Buying TIPS or related ETFs when signs of inflation appear can yield high returns, but during periods of high inflation like now, they may fall short of expectations." Especially during interest rate hikes, yields on regular bonds also rise, so TIPS do not guarantee higher returns than regular bonds.

Floating rate bonds, whose interest rates change over time, also lack strong investment appeal. Team Gong evaluated, "They are bond products that can defend against rising interest rates, but it is difficult to achieve returns exceeding inflation rates. It is hard to expect high returns from bond investments during periods of interest rate hikes."

◇ Metals: Large Gap Between Futures and Spot Prices... Caution Needed in Investment = Commodity investments require caution. Due to the Russia-Ukraine war, commodity prices have already surged significantly, leading to mixed forecasts. Some expect prices to rise further, while others believe entering now will not yield substantial returns.

Most commodity ETFs and exchange-traded notes (ETNs) trade futures prices. Futures incur rollover costs when selling the nearest contract at maturity and reinvesting in the next contract, causing a gap with spot prices. Recently, nickel showed the largest gap between futures and spot prices among physical assets. Russia, accounting for 10% of global nickel production, faced export sanctions, driving prices up. Early this month, nickel spot prices were in the $40,000 per ton range, but the London Metal Exchange (LME) 3-month futures price surpassed $100,000, leading to a suspension of nickel trading. Consequently, inverse products are being delisted.

Looking at metal ETF returns over the past three months: △TIGER Metal Futures (H) +23.40%, △KODEX Silver Futures (H) +13.08%, △TIGER Copper Physical +11.92%, and Gold and Silver Futures (H) +8.83%. Metal ETN returns (excluding leveraged products) were △Daishin Nickel Futures ETN (H) +85.84%, △Daishin Aluminum Futures ETN (H) +26.83%, △Daishin Iron Ore Futures ETN (H) +21.67%, and △Daishin Zinc Futures (H) +15.60%.

◇ Crude Oil: Forecasts of $200 per Barrel = Over the past three months, crude oil ETF returns were KODEX WTI Crude Oil Futures (H) +61.7% and TIGER Crude Oil Futures Enhanced (H) +61.3%. KBSTAR U.S. S&P Oil Production Companies (Synthetic H), which invests in oil-producing companies, also posted a +32.9% return. However, volatility in the oil market has increased, making predictions difficult. The U.S. government engaged in nuclear talks with Iran to ease concerns about oil supply shortages, but these talks have been temporarily suspended, and OPEC's decision on production increases remains uncertain.

A Daishin Securities official said, "A highly volatile market means a greater possibility of losses. Caution is needed with inverse and leveraged products that have increased divergence rates."

◇ The Timeless 'Gold'... Funds Are Advantageous = Gold prices usually fall during interest rate hikes, but there is speculation that demand will increase due to commodity price volatility and inflation concerns. Gold investments are divided into direct investment (KRX Gold Market, Gold Banking), ETFs, and funds. ETFs track gold futures indices, while gold funds (equity type) mainly invest in mining or extraction companies. As mentioned earlier, gold prices tend to decline during interest rate hikes, so funds investing in gold-related company stocks are more advantageous in terms of returns. The 'IBK Gold Mining' fund is a representative example.

Among gold ETFs, Samsung Asset Management's 'KODEX Gold Futures (H)' and Mirae Asset Management's 'TIGER Gold Futures (H)'?the largest in domestic net assets?have recorded returns in the 8% range over the past three months. Korea Investment Trust Management's 'KINDEX KRX Gold Physical' ETF posted a 3-month return of 9.49%.

If considering direct investment, the KRX Gold Market is advantageous. Trading fees (0.3%) are lower than Gold Banking (1.0%), and capital gains are tax-exempt. Gold Banking and gold ETFs are subject to dividend income tax (15.4%) on capital gains. However, if gold is physically withdrawn, the KRX Gold Market also charges a purchase fee (0.3%) and value-added tax (10%).

◇ REITs: Favorable Defensive Assets During Interest Rate Hikes = REITs and dividend stock investments are also gaining attention. Real estate REITs are among the assets that defend against inflation, as they benefit from rental income and rising real estate prices. Furthermore, government policies to revitalize public REITs have expanded the REIT ETF market, lowering entry barriers with various products being launched.

KINDEX Singapore REIT by Korea Investment Trust Management yielded 4.20%, and Mirae Asset Management's TIGER REIT Real Estate Infrastructure ETF yielded 2.75%, showing the best returns. Notably, the 'TIGER REIT Real Estate Infrastructure ETF' excluded relatively volatile high-dividend stocks in its regular December rebalancing. A Mirae Asset Management official explained, "The regular rebalancing transformed it into a product specialized in special assets such as infrastructure and REITs. It lowered volatility compared to major indices like KOSPI and KOSDAQ and increased expected returns." The dividend yield of this REIT ETF last year was 5.27%.