Analysis of ETF Spread and Increased Volatility in the Korean Stock Market
Recently, it has been analyzed that the spread of Exchange Traded Funds (ETFs) is increasing the volatility in the Korean stock market. According to DS Investment & Securities, higher ETF holdings increase market return synchronization, thereby amplifying volatility during short-term market fluctuations. However, it is noted that in a longer term, stock prices are driven by corporate fundamentals.
The KOSPI index and large-cap stocks have shown extreme volatility due to external factors such as the U.S.-Iran conflict. Particularly, trading by individual investors in ETFs has driven the index upwards, resulting in rapid market expansion. Experts point out that the basket trading mechanism of ETFs directly impacts stock prices.
Moreover, ETFs have been identified as a cause of increased volatility in the domestic stock market. In the recent decline and recovery process of KOSPI due to geopolitical risks, selling pressure from ETFs increased market volatility. ETFs are structurally compelled to sell index component stocks in a downturn, which adds selling pressure. Nonetheless, in the long term, it has been analyzed that stock prices are determined by corporate fundamentals.
This week, the volatility of the domestic stock market was exacerbated by the aftermath of military conflicts between the U.S. and Iran, with the KOSPI index experiencing rapid declines and rises. Individual investors' trading through leveraged ETFs was cited as a major cause, and increased exchange rate volatility and foreign capital outflow also added to volatility. However, volatility is expected to diminish if geopolitical issues do not prolong, with upcoming shareholder meetings and first-quarter earnings season acting as important variables.
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