ETF Investment in Rapid Increase
As of March 29, the total net asset value of the Exchange Traded Funds (ETFs) on the KOSDAQ market reached 4.4803 trillion won, increasing about 60% in just three months. Such a rapid increase was because of the rally of the KOSDAQ market in the first quarter of this year. Investors focused on the KOSDAQ 150 Leverage ETF in particular.
At present, the increase in ETF investment is fueling bubbles in KOSDAQ-listed biotech companies. Most of the top market cap companies in the market are biotech and healthcare firms and their stock prices are currently overrated with the passive funds being invested in accordance with their market cap ratios regardless of their fundamentals.
One of the typical examples is Naturecell. The company was incorporated into the KOSDAQ 150 Index in December last year, and then institutional investors, which had no Naturecell share at all until then, bought a large number of its shares. As a result, the stock price broke the 20,000 won mark late last year and 30,000 early this year. Besides, it exceeded 60,000 won on March 16 after the news that the company would be incorporated into the FTSE Index. However, it dropped to 26,850 won per share on March 30 after the Ministry of Food and Drug Safety of South Korea retracted its conditional approval for Naturecell’s stem cell therapy Jointstem.
A bigger problem is that the same can be repeated with ETF investment showing a rapid increase. “Passive funds buy and sell stocks in a mechanical way to follow their ratios in the index, and this means the funds may cause some stock price distortion irrespective of market valuation,” said an industry source, adding, “This can be resolved only when the total asset value of ETFs decreases, which is impossible now in view of market trends.”
According to Yuanta Securities, South Korean healthcare companies’ PER is currently 75.8. For reference, it was 37.5 to 47.1 in October last year, when the total net asset value of the ETFs was half of the current level, and the PER of American companies in the same industry is 16.2.