South Korean investors pour money into Japan-listed US ETFs

South Korean investors are increasingly turning to Japan-listed currency-hedged exchange traded funds that invest in the US hoping to cash in on a trend that has seen the yen weaken against the dollar.

US-focused ETFs were listed among the top five most purchased Japanese stocks and funds by South Korean investors in the past three months but did not even appear in the list of the top 100 most popular products in the same period last year, according to Korea Securities Depository data.

Between August 19 and November 18, the Nikko Listed Index Fund US Equity Nasdaq100 ETF Hedged ETF was the second most popular product registering net inflows of $9.9mn, more than double the $4mn recorded in the preceding three months.

BlackRock’s iShares 20+ Year US Treasury Bond JPY Hedged ETF, which pulled in $7.3mn from Korean investors, was the third most popular product and represented a surge of interest from the $322,000 it garnered in the previous three months.

Fourth-ranked BlackRock’s iShares S&P 500 JPY Hedged ETF, attracted $4.9mn.

South Korean investors can access Japan-listed funds through Korean brokerages.

“Investors essentially have to go through two currency exchanges and they are willing to pay the commission because their purpose is to profit from fluctuations in the exchange rate, predicting the dollar will become even stronger than the yen,” said Junkee Cho, a Seoul-based analyst at SK Securities.

But Cho said these investments were a risk given that the US dollar was already strong against the yen.

Hae-in Kim, a researcher at South Korea’s Daishin Securities, said in a recent report that the Japanese currency would continue to be weak against the US dollar throughout the rest of the year and up until February next year.

JPMorgan economists said in a report earlier this month that they anticipated a “mild” recession in the US next year due to quantitative tightening.

Goldman Sachs strategists have projected that the US economy will perform better than Europe, saying in a note: “Despite concerns that investors have about the US equity market, we believe it offers greater absolute and risk-adjusted return potential than recession-plagued European markets.”

In August, South Korean investors flocked to locally listed ETFs that invest in Japanese companies to take advantage of the tumbling yen and the low valuation of Japanese stocks.

Mirae Asset Global Investment’s unhedged Tiger Japan Nikkei 225 ETF, which tracks Japan’s Nikkei 225 index, recorded a 23-fold jump in assets to Won350bn ($260mn) in the year to August 18, according to Korea Exchange data.

The inflows swelled even as returns slumped by 5 per cent to well below the index’s fall of 1.23 per cent.

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