[Beginner's Guide] 'ETF' Attracting Money Amid Stock Market Decline... Why It Increased by 7 Trillion This Year Alone

Funds listed on the stock market and traded like stocks
Excellent risk diversification with various investment structures

Editor's Note[Joorini Guide] is a smart investment guide for 'Joorini' (stock + beginner) investors. We will kindly and easily explain stock stories that are unfamiliar to Joorini.

[Asia Economy Reporter Kwon Jaehee] Despite the chilly stock market, investors leaving the market are actually flocking to Exchange Traded Funds (ETFs).

In fact, as the Korean stock market has fallen nearly 20% this year, investor deposit funds, which are standby funds for the stock market, decreased to 45.2138 trillion KRW as of December 15.

Compared to over 70 trillion KRW at the beginning of January this year, this is a significant decrease.

Investor deposit funds are an indicator to gauge the enthusiasm for stock investment; the larger the amount, the hotter the investors' interest.

On the other hand, more funds have flowed into the Exchange Traded Fund (ETF) market.

The total net asset value of ETFs reached 80.2975 trillion KRW as of December 16, increasing by more than 7 trillion KRW this year alone.

What is it about ETFs that attracts investors?

What is an ETF?

ETF stands for Exchange Traded Fund.

As the name suggests, it is a fund product listed on the stock market that can be easily bought and sold like stocks.

In other words, ETFs combine the advantages of stocks and funds simultaneously.

ETFs landed in Korea on October 14, 2002, starting with 4 items and a total net asset value of 355.2 billion KRW, and have grown to 655 items with a total net asset value exceeding 80 trillion KRW.

The rapid growth in such a short period is due to various advantages.

One representative advantage is the low management fee.

Funds typically charge a management fee exceeding 1% as a management cost and impose fees upon early redemption.

Also, it usually takes about a week to secure cash after redemption.

However, ETFs have a low management fee of about 0.2% and, like stocks, cash can be secured two days after selling.

There is one more very big advantage.

Unlike domestic stocks, ETFs are not subject to transaction tax upon sale.

However, please note that dividend income tax must be paid depending on the type of ETF regarding capital gains.

Types and Composition of ETFs

Just as numerous sectors' stocks are listed and traded in the stock market, ETFs come in various types.

They are composed of various products such as index-type, sector-type, overseas index-type, and bond-type.

The charm of ETFs is that you can indirectly invest in most products traded in the global market.

Index-type ETFs track indices such as KOSPI 200 and KOSDAQ 150.

If you search for ETFs, you will see products like KODEX200, KODEX Leverage, TIGER 200, TIGER Leverage, and so on.

KODEX and TIGER are names that distinguish ETFs created by different asset management companies.

KODEX is a product by Samsung Asset Management, and TIGER is by Mirae Asset Management.

200 means KOSPI 200, and Leverage means 2 times.

Leverage products are designed to yield 2% profit when the KOSPI 200 index rises by 1%.

Conversely, there are 'Inverse' products.

Products like KODEX Inverse track the KOSPI 200 index inversely and are designed to generate profits when the market falls.

Additionally, there are sector-type ETFs that track specific sectors such as semiconductors and secondary batteries.

Theme-type ETFs that track high dividend stocks, media and content, Samsung Group stocks, etc.

There are also overseas index-type ETFs that track indices like the NASDAQ in the U.S., the Hang Seng Index in Hong Kong, and the Nikkei Index in Japan, similar to tracking KOSPI 200.

Bond-type ETFs track government bonds or corporate bonds.

Currency-type ETFs track major currencies such as the Korean won and U.S. dollar.

Commodity-type ETFs track commodities like crude oil and gold.

Why are funds flocking to ETFs even in a bear market?

Among the top 10 ETFs by return this year, 6 are 'Inverse ETFs' that generate profits when the market declines.

'Inverse' was briefly explained earlier in the types and composition of ETFs.

Basically, stocks generate profits when the stocks you hold rise.

However, ETFs have various products that can generate profits even in a bear market depending on their composition.

A representative example is the previously mentioned 'Inverse' product, and there is also an 'Inverse Leverage' product that adds a compounding effect to the inverse product.

Besides these, the ETF that attracted the most funds this year is the bond-type ETF.

This year alone, 9.4929 trillion KRW flowed in, bringing the total asset size to 18.8864 trillion KRW.

With bond investment activated amid rising interest rates and the ability to redeem according to yield upon maturity like regular bonds, it seems to have been attractive to investors.

Contrasting last year's boom, many Joorini investors likely suffered losses as the stock market declined this year.

However, if you look closely, there are many ETF products that can generate profits even in a bear market.

You can diversify risk with ETFs or steadily accumulate sector-type ETFs like those for promising future industries such as secondary batteries and invest long-term like saving money.

The more you know, the more profitable ETFs become. We conclude this article cheering for the wise investments of Joorini investors today as well.

This article is from [Joorini Guide], published weekly by Asia Economy. We explain not only stock-related financial news but also difficult economic stories in an easy and friendly way so that stock beginners can understand. Click subscribe to receive articles for free.

☞Subscribe