Momentum ETFs Struggle as Korea Market Lacks Clear Leadership

Momentum strategy exchange-traded funds (ETFs), which invest more heavily in rising stocks, are underperforming expectations as Korea's stock market lacks a clear leading sector.

As the direction of leading sectors shifts in short cycles, the performance gap among ETFs using the same strategy is widening due to increasing divergence in returns by industry.

According to Korea Exchange data as of January 5, Samsung Asset Management's KODEX Momentum ETF posted a three-month return of 21.49 percent. This underperformed both the KOSPI index (28.11 percent) and the KOSPI 100 ETF (35.65 percent) over the same period.

The defense sector, which had a large weighting in the ETF, faced profit-taking pressure as prospects for an end to the Russia-Ukraine war emerged, acting as a major headwind.

Mirae Asset Global Investments' TIGER Momentum ETF also failed to escape the sluggish trend. Its three-month return of 13.77 percent widened the gap to more than 20 percentage points below the KOSPI 100 index.

The fund's broad stock diversification meant it did not fully capture the rally centered on Samsung Electronics (005930.KS) and SK hynix (000660.KS), while the defense and shipbuilding sectors recently entered a simultaneous correction, dragging down returns.

Sector ETF performance data confirms the correction trend. According to Korea Exchange data, PLUS K-Defense, a representative defense ETF, posted a one-month return of negative 10.97 percent, ranking near the bottom. SOL Shipbuilding Top 3 Plus ETF, which invests in large shipbuilding stocks, also struggled with a negative 7.73 percent return over the past month.

The intensifying rotation among sectors including semiconductors, automobiles, biotech, and robotics over short periods is also cited as a factor behind the momentum ETF weakness.

While some sectors have seen short-term surges following specific events such as earnings releases or policy announcements, the sharp rise in the won-dollar exchange rate last month disrupted foreign investor flows, creating a pattern where rallies fail to sustain momentum.

"Market liquidity has thinned, leading to a continued phase where divergence among individual stocks is widening based on specific catalysts," said Han Ji-young, an analyst at Kiwoom Securities.

However, securities firms are placing greater odds on semiconductors re-emerging as the leading sector going forward.

Samsung Asset Management recently added Samsung Electronics to its ETF with a 12 percent weighting through rebalancing, while also expanding SK hynix's weighting to nearly 20 percent.

The probability of a U.S. Federal Reserve rate cut this month has surged, raising expectations for a liquidity-driven rally, and concerns about an artificial intelligence (AI) bubble have recently subsided, which appear to have influenced the decision.

Mirae Asset Global Investments also differentiated its approach by adding SK hynix to its top holdings in anticipation of an AI industry boom, while increasing weightings in power equipment stocks including Iljin Electric (103590.KS), Hyosung Heavy Industries (298040.KS), Sanil Electric (062040.KQ), and HD Hyundai Electric (267260.KS).

The firm judges that earnings improvement in the power equipment sector driven by expanded power infrastructure investment at home and abroad remains valid over the medium to long term.

Some asset managers are paying more attention to KOSDAQ growth stocks than KOSPI large caps. TIMEFOLIO KOSPI Active ETF from Timefolio Asset Management had all of its top 10 holdings listed on the KOSPI just a month ago, but recently four KOSDAQ stocks have moved into the top rankings: Alteogen (196170.KQ), ABL Bio (298380.KQ), Rainbow Robotics (277810.KQ), and Duksan Neolux (213420.KQ).

"In an environment where leading sectors are rapidly rotating, single-strategy ETFs will inevitably see short-term performance volatility," an asset management official said. "Since momentum ETF performance ultimately depends on whether specific sectors regain growth momentum, investors need to continuously monitor the rebalancing direction of each product."