[Practical Finance] With Prolonged High Interest Rates, Investors Turn to Bond ETFs

Period of Increasing Investment Appeal After Interest Rate Hikes
Easy Investment Leads to Net Inflow of 8.2682 Trillion KRW into Bond ETFs from Early This Year to Late October
Series of Related ETFs Listed Including KODEX 10-Year Treasury Bond Active
"Strategy Focusing on Stable Interest Over Capital Gains Is Advantageous"

As the high interest rate phase prolongs, interest in bond investment is growing. Since bond prices fall when interest rates rise, the recent increase in rates has provided an opportunity to enter the bond market. In particular, bond exchange-traded funds (ETFs) are emerging as a convenient way to invest in bonds.

With the continuation of the high interest rate trend, there is an analysis that this is the right time for bond investment. Park Seok-jung, a researcher at Shinhan Investment Corp., explained, "Just as the stock market requires increasing stock allocation during a downturn, the bond market also becomes more attractive for investment after price declines (interest rate rises). In this uncertain period where nothing can be predicted, the rise in interest rates has increased the carry appeal of safe assets, and the spread of uncertainty has rather expanded capital gains (interest rate declines), making it possible to expect performance exceeding that of risk assets."

For investors interested in bond investment but unsure how to start, bond ETFs are considered an easily accessible investment option. Reflecting this demand, bond ETFs have been consecutively listed recently.

According to the Korea Exchange on the 15th, Samsung Asset Management's 'KODEX 10-Year Treasury Bond Active', NH-Amundi Asset Management's 'HANARO CD Rate Active (Synthetic)', and BNK Asset Management's 'BNK 24-11 Corporate Bond (AA- or higher) Active' ETFs were listed the previous day.

An exchange official explained the background of the bond ETF listings, saying, "Expectations for reaching the peak of interest rates have expanded, and in the current high interest rate environment, investors can receive high yields (YTM) and also expect capital gains when interest rates fall, leading to increased demand for bond investments."

KODEX 10-Year Treasury Bond Active is an ETF that focuses on investing in a basket of 10-year treasury bonds (three issues as of the end of October), which are the underlying assets of the near-month 10-year treasury futures. HANARO CD Rate Active (Synthetic) is a synthetic ETF targeting low-risk investors, providing daily announced CD 91-day interest rate yields. BNK 24-11 Corporate Bond (AA- or higher) Active diversifies investment in domestic corporate bonds with credit ratings of AA- or higher, maturing around the same time as the duration (November 29, 2024).

Earlier, on the 7th, Shinhan Asset Management's 'SOL Ultra-Short-Term Bond Active ETF' and Kiwoom Asset Management's 'Heroes 30-Year Treasury Bond Active' were listed. The SOL Ultra-Short-Term Bond Active ETF is a parking-type ETF for surplus funds and short-term liquidity, composed mainly of high-quality short-term financial products such as ultra-short-term bonds (with remaining maturity within 3 months, credit rating A- or higher) and commercial paper (A2- rating or higher), reducing volatility caused by interest rate fluctuations. Additionally, it seeks extra interest income through undervalued quality stock discovery and repurchase agreement (RP) sales.

Heroes 30-Year Treasury Bond Active mainly invests in the three most recently issued 30-year treasury bonds. This ETF tracks the 'KIS-Kiwoom 30-Year Treasury Bond Index' and aims to outperform the index through active management. Its annual total expense ratio is 0.035%, the lowest among 30-year treasury bond ETFs listed in the domestic market.

Yoon Jae-hong, a researcher at Mirae Asset Securities, explained, "As of the end of September this year, the total size of domestic bond ETFs was 24.4178 trillion KRW (22.6 trillion KRW domestic, 1.9 trillion KRW overseas), and growth has accelerated this year. The net asset value growth rate compared to the end of last year is 73.7% for domestic bonds and 90.9% for overseas bonds, exceeding the overall ETF market growth rate of 38.9%." He added, "Along with product diversification, capital inflows continue, with net inflows into bond ETFs amounting to 8.2682 trillion KRW through the end of October this year."

When investing in bond ETFs, investors should consider the investment target, duration, and liquidity. Researcher Yoon said, "Ease of market access and trading, and easy diversification are factors expanding demand for bond ETFs despite relatively unfavorable tax treatment compared to individual bonds. When selecting bond ETFs, suitability and liquidity should be considered. Suitability involves choosing investment targets (government bonds, high-yield bonds, special bonds, etc.) and durations (from ultra-long to ultra-short) that match the investment purpose. Liquidity can be assessed through trading volume and premium/discount rates."

Park Woo-yeol, a researcher at Shinhan Investment Corp., said, "In bond investment, a strategy focusing on stable interest income (carry) rather than capital gains is advantageous. From a trading perspective, strategies should flexibly trade by setting an interest rate range box rather than following momentum, depending on the direction of interest rates. For the 10-year U.S. Treasury yield, a range of 3.9% to 5.5% is suggested for 2024." He added, "Referring to frequently released economic indicators, the economic surprise index, and technical indicators will help in decision-making."