[Dividend Investing in an Era of Uncertainty③] Key Investment Themes for Seohak Gaemi: Dividends and Bond ETFs

Editor's NoteAs the global financial market environment deteriorates and uncertainty over capital gains increases, demand from investors seeking stable income has grown, bringing dividend investing into the spotlight. With the increase in dividend Exchange Traded Products (ETPs), investment opportunities are expanding, and the market size is expected to grow steadily. Growing interest from general investors in shareholder returns is also driving companies to increase their dividend payouts, further fueling market expansion.

[Asia Economy Reporter Myung-Hwan Lee] The attention of Seohak Gaemi (domestic investors investing in overseas stocks) is turning toward dividend and bond Exchange Traded Funds (ETFs). As uncertainty in the global stock market increases due to inflation and interest rate hikes, investors are focusing on dividend income and bonds. The securities industry interprets that dividend and bond ETFs can serve as defensive and stability-seeking investment tools, reflecting a wise investment strategy.

On the 1st, Asia Economy reviewed the top overseas stock net purchases by domestic investors in August through the Korea Securities Depository’s Securities Information Portal (SEIBro). It was found that many ETFs based on high-dividend stocks or bonds ranked high. Among the top 10 net purchase items by domestic investors, four were ETFs tracking high-dividend stocks or bonds.

Domestic investors purchased $70.57 million (approximately 95.5 billion KRW) worth of 'Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF),' an ETF based on government bonds, making it the second most net purchased item in August. This ETF is a leveraged ETF that tracks 3 times the performance of 20-year U.S. Treasury bonds. 'iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD),' which invests in corporate bonds rated investment grade or higher, also ranked 9th.

ETFs investing in high-dividend stocks also ranked high. 'Schwab U.S. Dividend Equity ETF (SCHD),' which focuses intensively on dividend growth stocks, ranked 7th. It was followed closely by 'JPMorgan Equity Premium Income ETF (JEPI),' a monthly dividend covered call ETF. Covered calls involve trading stocks and options simultaneously; by holding stocks and selling call options at a somewhat higher price, risk is reduced. Although returns are lower during rising markets, losses can be limited during downturns, making it suitable for sideways or bearish markets.

The reason Seohak Gaemi added these items to their portfolios is interpreted as a defense against declining returns amid market uncertainty. This is due to a combination of factors including growing inflation concerns in the second half of the year, the Federal Reserve’s tightening stance, and an unprecedented strong dollar. In the first half of this year, there were no high-dividend or bond-related ETFs among the top 10 net purchases by domestic investors.

As uncertainty in the global stock market is expected to continue for the time being, the securities industry forecasts that dividend-type ETFs seeking stability will show growth. Jaehong Yoon, a researcher at Mirae Asset Securities, said, "Interest in monthly dividend formats is sufficiently high domestically, so continuous listings of monthly dividend ETFs are expected in the future." He added, "Even for high-dividend types, if factors related to dividend sustainability such as dividend payout ratio and earnings stability are considered in index composition, a certain level of stability can be achieved."

However, there is also advice to carefully examine the underlying assets when investing in monthly dividend ETFs. Researcher Yoon advised, "Monthly dividends are not simply about increasing the frequency of dividend payments but are judged to help generate more predictable and responsive cash flows." He emphasized, "The most important criteria should be the sustainability and stability of dividends, which can be assessed by the nature of the underlying assets."

Regarding bond ETFs, there was an evaluation that the bond covered call ETF newly listed on the U.S. stock market on the 26th of last month is worth attention. Insik Kim, a researcher at IBK Investment & Securities, said, "This is a phase where expectations for interest rate cuts coexist with concerns about a recession." He diagnosed, "Bond covered call ETFs will attract attention as products that respond to bond price increases amid economic risks and bargain hunting, while hedging downside risks through option premiums amid tightening vigilance."