The Only Trustworthy Investment: U.S. Stocks… Investors Flock to U.S. for Stocks and Dividends

At the beginning of August, the South Korean stock market witnessed some historic events. 

At the beginning of August, the South Korean stock market witnessed some historic events. After a record-setting drop, it quickly rebounded with one of the largest increases ever, leaving investors astounded. Private bankers (PBs) at securities firms have noted, "Such a deep trough and rapid rebound are unprecedented based on historical experience." Despite this temporary adjustment phase, some investors made bold bets on the U.S. market, acquiring large amounts of leveraged ETFs that track struggling tech stocks and steadily investing in dividend ETFs composed solely of U.S. companies.

So, what has been the outcome? After a V-shaped recovery, the consensus is that "the U.S. is indeed the most reliable." Meanwhile, emerging securities firms focused on U.S. stock trading are rapidly increasing their market share. However, the situation is far from settled. With the upcoming presidential election in November and ongoing geopolitical risks in the Middle East, as well as uncertainties surrounding a potential recession and interest rate cuts, the market remains unpredictable. Today, on Sunday Money Cafe, we will explore which stocks investors purchased during the dramatic Black Monday period earlier this month and how the South Korean financial investment sector is evolving in response.

Leveraged ETFs Purchased by South Korean Investors... Betting on 'U.S. Stock Market Rebound' Proves Successful

South Korean individual investors, who invest in overseas markets, heavily purchased high-risk, high-reward leveraged ETFs following the massive drop on the 5th of this month.

According to the Korea Securities Depository, from the 5th to the 16th of this month, the "Direxion Daily Semiconductor Bull 3X ETF," which tracks the Philadelphia Semiconductor Index three times, saw a net purchase amount of $506.65 million (approximately 6.86 trillion KRW), making it the top net purchase among individual investors. During the same period, they also bought $128.55 million (approximately 1.74 trillion KRW) worth of "ProShares UltraPro QQQ ETF," which tracks the Nasdaq 100 Index three times, and $87.47 million (approximately 1.18 trillion KRW) worth of "Invesco QQQ Trust SRS 1 ETF," which tracks the Nasdaq 100 Index once. Additionally, the "GraniteShares 2X Long Nvidia Daily ETF," which tracks Nvidia’s daily returns twice, ranked fourth in net purchases.

This bold move by South Korean investors has been seen as following the stock market adage "buy in fear." Fortunately, the VIX index, which measures market fear, fell to 14.80 as of the 16th, and the U.S. stock market largely recovered from the dramatic drop on the 5th. As of the 16th, the Philadelphia Semiconductor Index had risen by 14.40% compared to the 5th, while the Nasdaq and S&P 500 indices increased by 8.87% and 7.09%, respectively.

In the current situation, it seems that their bold bet has paid off. On the 23rd, during the Jackson Hole meeting, Federal Reserve Chairman Jerome Powell suggested a rate cut in September, rapidly reducing the risk of a recession. However, factors such as heightened military tension in the Middle East, the potential for a recession, and additional unwinding of the Carry Trade remain sources of concern. It remains to be seen if the investors who bet heavily on U.S. tech stocks during Black Monday will be smiling at the end of the year. We will need to keep an eye on developments.

"Dividend ETFs Also Headed to the U.S." South Korean Investors Buy 1 Trillion KRW Worth

This year, South Korean investors have purchased nearly 1 trillion KRW worth of U.S.-only dividend ETFs, more than four times the amount invested in domestic dividend ETFs. Despite the government's efforts to encourage dividends through the "Value-Up" program, investors are increasingly turning to ETFs based on U.S. companies that already offer stable shareholder returns.

According to financial information provider FNGUIDE, South Korean individual investors have net purchased a total of 935 billion KRW worth of U.S. Dividend Dow Jones ETFs from Mirae Asset, Samsung, Shinhan, and Korea Investment Trust. Mirae Asset’s "TIGER U.S. Dividend Dow Jones ETF" saw a purchase amount of 660.9 billion KRW, while Shinhan Asset Management and Korea Investment Trust saw net purchases of 121.9 billion KRW and 101.7 billion KRW, respectively.

In contrast, individuals have only net purchased 206.6 billion KRW worth of domestic dividend ETFs, excluding covered call strategies.

This trend indicates a clear preference for U.S. investments, not only targeting capital gains but also dividend-related ETFs. The U.S. Dividend Dow Jones ETF is essentially the Korean version of the popular U.S. dividend ETF "SCHD ETF," which tracks the "Dow Jones U.S. Dividend 100 Index." This index selects the top 100 stocks from U.S. companies with a history of maintaining dividends for 10 years, based on indicators such as free cash flow, return on equity (ROE), and dividend yield.

U.S. dividend stocks are valued not only for their stable dividends but also for capital appreciation. For example, Lockheed Martin, a major holding in U.S. Dividend Dow Jones ETFs, has seen its stock price increase more than fourfold over the past decade. Additionally, the ability to diversify investments across various sectors such as defense, biotech, and food, unlike in Korea where high dividend stocks are mainly concentrated in finance and securities, is a significant advantage. With the "Value-Up" program lagging in Korea, domestic investors are naturally shifting their focus to the U.S.

As a result, competition among domestic asset management firms managing U.S. dividend ETFs is intensifying. Following Korean Investment Trust, Mirae Asset, and Shinhan Asset Management, the leading firm Samsung Asset Management has also entered the market with similar products. Asset managers are diversifying dividend payment dates to attract investors.

One firm significantly increasing its market presence among South Korean investors is the newly established Toss Securities, which has only been in operation for three years. Toss Securities is focusing on various benefits for investors flocking to U.S. stocks and has become the second-largest in overseas stock market share, surpassing Samsung Securities and Mirae Asset Securities in the first half of the year.

According to the semi-annual report disclosed by the securities firm on the 25th, Toss Securities recorded 68.7785 trillion KRW in foreign securities trading volume (combined buy and sell transactions) for the first half of the year, securing a 15.02% market share. This is a significant increase from last year, where Toss Securities was ranked fourth, and its trading volume has more than doubled compared to the previous year's first half. The fees earned also increased from 33.8 billion KRW to 65 billion KRW.

A key factor in Toss Securities’ success with individual investors is its customer-friendly services. Toss Securities offers stock trading through its app, providing intuitive interfaces and services that enhance investor convenience. The service also includes real-time currency exchange, addressing a major inconvenience in overseas stock trading. Additionally, Toss Securities was the first domestic securities firm to introduce fractional trading of international stocks.

In contrast to Toss Securities, large securities firms have seen only slight increases or even decreases in their market share. Kiwoom Securities, which has maintained the top spot, saw its share remain nearly unchanged from 20.37% last year to 20.75% this year. Samsung Securities saw a modest increase from 13.82% to 14.22%. Mirae Asset Securities, which was ranked second last year, saw its market share drop from 14.97% to 14.19%, falling to fourth place. NH Investment & Securities also saw its share decrease by about 3 percentage points to 8.01%, placing it in sixth place.

As a result, domestic securities firms are making efforts to attract South Korean investors by offering free online trading fees for U.S. stocks and a 90% favorable exchange rate benefit for one year. The competition between customer-friendly new securities firms and traditional domestic securities firms is becoming increasingly interesting.