Foreign Capital Flowing into S. Korean ETF Market

Foreign capital is flooding the South Korean exchange-traded fund (ETF) market. Passive funds which invest in emerging markets as a whole are common but the net assets of “Korea ETF” targeting South Korea are rising significantly. Passive funds refer to investment funds that passively track an index.

Foreigners’ non-arbitrage transactions and global ETFs investing in South Korea are increasing at the same rate in the country’s stock market, according to industry sources on Jan. 29. Non-arbitrage trading only deals with spot goods and is generally called as “basket trading.” A basket trade is an order to buy or sell more than 15 stocks on the KOSPI market in group simultaneously.

A simultaneous growth in both non-arbitrage transactions and global ETFs investing in South Korea means that foreign capital flowing into the domestic market through ETFs are investing in the country’s top companies in terms of market capitalization as a whole, instead of focusing on individual stocks.

Korea Exchange (KRX) and NH Investment & Securities Co. said that the non-arbitrage transactions by foreigners for this year came to 2.87 trillion won (US$2.56 billion) as of Jan. 25. The figure increased by 66 percent from 1.73 trillion won (US$1.54 billion) in December last year and by 15.74 percent from January last year when the index hit 2,600. It means that an increasing amount of foreign capital is placing orders for a group of securities in South Korea.

A representative global ETF investing in South Korea is the “iShares MSCI South Korea ETF” of BlackRock Inc. The ETF has been growing rapidly since November last year. The net assets of the ETF stood at US$4.19 billion (4.69 trillion won), of which US$360 million (402.84 billion won) entered the Korean market this year.

The BlackRock’s ETF investing in South Korea was first set up on May 9, 2000, and traded at US$3.50 million (3.92 billion won) a day on average over the past 20 days. It has made diversified investment in 115 domestic companies and owns a 22.18 percent stake in Samsung Electronics Co., 5.48 percent in SK Hynix Inc., 2.67 percent in POSCO, 2.55 percent in Hyundai Motor Co., 2.36 percent in KB Financial Group and 2.34 percent in Naver Corp.

An official from a securities firm said, “The amount of non-arbitrage transactions has been growing from the beginning of the year, except for just three days. Foreigners are expected to continue to show a strong buying trend through non-arbitrage trading for the time being.”