Fueled by retirement pension inflows, ETFs have evolved into a core trading vehicle for Korean retail investors.
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Exchange-traded funds now account for 30 percent of trading value on the Korean stock market, driven by surging demand from retail investors, according to a report by the Korea Investment Securities on Friday.
Retail investors were net buyers of 64.3 trillion won ($41.9 billion) worth of listed shares and 55.3 trillion won worth of ETFs so far this year.
By contrast, foreign investors were net sellers of about 111 trillion won worth of listed shares and ETFs combined.
The scale of retail investors' net purchases exceeded foreign investors' net sales, suggesting that individuals have effectively supported the rally in the Korean stock market.
Korea Investment Securities attributed the rise in ETF trading mainly to strong demand from retail investors.
"The market capitalization of ETFs accounts for only about 6 percent of the overall stock market, but their share of trading value has expanded to 30 percent," said Yum Dong-chan, an analyst at Korea Investment Securities.
"Driven by retirement pension inflows, ETFs have evolved beyond a supplementary investment vehicle and become a key trading instrument in the Korean stock market," he added.
Some market participants have raised concerns that the rapid growth of the ETF market could lead to greater concentration in large-cap stocks, as most ETFs are heavily weighted toward companies with large market capitalizations.
However, Korea Investment Securities said its analysis of the US market found no clear relationship between a higher share of ETF trading and a premium for large-cap stocks.
While ETF inflows may boost demand for large-cap stocks in the short term, they are not a decisive factor in explaining the long-term outperformance of large-cap shares, the brokerage said.
The brokerage also said the increase in ETF trading has improved market efficiency, reducing the frequency of ETFs trading at a discount to their net asset value (NAV).
Yum noted that semiconductor and information technology ETFs have recently traded at relatively high premiums to NAV, while Kosdaq-focused and high-dividend ETFs have shown relatively large discounts.
"Premiums and discounts are more closely related to investor preferences than to fundamentals," Yum said. "The data suggest that retail investors continue to favor semiconductor-related investments."
ch0221@heraldcorp.com
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