Foreign Investors Sell Korean Stocks While Scooping Up Leveraged ETFs

Foreign investors have recently been aggressively buying leveraged products in the exchange-traded fund (ETF) market. The move is seen as a strategy to generate short-term returns through leveraged products while selling their cash equities.
According to Koscom Corporation on Sept. 2, six of the top 10 ETFs by foreign investors’ net purchases over the past week, from Aug. 26 to Sept. 1, were leveraged products.
In particular, single-stock leveraged products saw notable inflows. KODEX SK hynix Single-Stock Leverage ETF ranked first with net purchases of 73.1 billion won. TIGER SK hynix Single-Stock Leverage ETF ranked third at 36.9 billion won, followed by TIGER Samsung Electronics Single-Stock Leverage ETF in ninth at 20.2 billion won and KODEX Samsung Electronics Single-Stock Leverage ETF in 10th at 19.7 billion won.
The KODEX Leverage ETF, which tracks the KOSPI Composite Index, ranked second with 52.6 billion won in net purchases. Mirae Asset TIGER Semiconductor TOP10 Leverage ETF, which focuses on semiconductor stocks, ranked eighth with 23.4 billion won in net purchases.
Foreign investors also showed a tendency to concentrate their investments in leveraged products, including Samsung KODEX Semiconductor Leverage ETF, which ranked 12th at 15.1 billion won, and Mirae Asset TIGER KOSDAQ150 Leverage ETF, which ranked 13th at 15 billion won.
By contrast, they continued to sell cash equities. During the same period, foreign investors recorded net sales of 1.9507 trillion won in the KOSPI Composite Index market. Their cumulative net sales since the beginning of the year had reached 171.5269 trillion won as of Sept. 2.
Brokerages say foreign investors have increased their short-term trading as the domestic stock market has recently experienced extreme volatility. They are reducing their equity exposure through mechanical selling for rebalancing and weaker appetite for risk assets amid external factors, while seeking short-term returns through leverage.
An executive at an asset management firm analyzed, "Korea has been viewed as a riskier market than overseas markets, and that perception appears to have strengthened further after the recent sharp swings." The executive added, "As a result, short-term investments exploiting volatility have increased instead of long-term stock holdings."
The executive continued, "Although the domestic stock market has significant upside potential because valuations have fallen, it ultimately cannot rebound unless supply and demand conditions improve." The executive added, "A recovery in the stock market will be possible only with support from foreign investor flows."
Some analysts also interpret the buying of leveraged products as evidence that investors remain positive about the outlook for the domestic stock market, since such products are designed to bet on a rising market. An asset management industry official said, "The expansion of short-term trading is a major concern," but added, "Investment in leverage also shows that investors expect a bull market to that extent."
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