Send to

After soaring past W75tr, can ETF market keep growing?

Local investors' voracious appetite shows no sign of abiding, but regulatory hurdles remain to limit market expansion

Oct. 23, 2022 - 13:49 By Jung Min-kyung
A person walks by the lobby at the Korea Exchange`s Seoul office. (Yonhap)
South Korea's exchange-traded funds combined market cap amounted to 75.5 trillion won ($52.6 billion) as of September, some 220 times larger than 344.4 billion won in October 2002, the latest data from the Korea Exchange showed.

ETFs -- a type of pooled investment security that tracks a particular index, sector, commodity, or other assets, which can be traded on a stock exchange -- have managed to capture the attention of Korean investors in recent years.

Twenty years ago, ETFs first landed in Asia’s fourth-largest economy’s as the economy was slowly recovering from the woes of the 1997 Asian financial crisis and Korean stock bourse was hit by the fallout of the dot-com bubble.

Their tendency to be less volatile than typical stocks and an association with “fun” themes such as K-pop, the metaverse and gaming make investors' portfolios more colorful.

Local asset managers, noting the surging interest, have been aggressively expanding their ETF business more than ever. Samsung Asset Management, a pioneer in the local ETF market by listing Kodex 200 on the KRX two decades ago, projects the market value to reach 300 trillion won by 2032.

“It is viable to say that Korea’s ETF market value will hit 300 trillion won by 2032,” Samsung Asset CEO Seo Bong-kyun said in a press conference marking 20 years of the Kodex 200 on Oct. 17.

Samsung Asset’s signature ETF brand Kodex series now accounts for 43.4 percent of the market, with the combined value of their assets under management amounting to 32.8 trillion won as of this month.

The nation’s No. 1 ETF manager’s growth strategy for the next 20 years focuses on cultivating its global, active and bond-type ETF portfolios as well as diversification of business, according to Seo. It plans to expand into target date funds and target retirement funds, as Korea nears becoming a superaged society.

“Samsung Kodex was at the forefront of the Korean ETF market. We plan to continue to lead the local ETF market’s growth and contribute to the development of our overall capital market,” Seo added.

The CEO of Chicago-based Amplify ETFs recently said that Korea’s ETF market had high growth potential, noting local investors’ voracious appetite and the changes that have come with the COVID-19 pandemic.

"In my initial assessment of the Korean ETF market, there were a lot of aggressive positioning and growth-centered strategies," he said. "There was a larger appetite for buying debt and risk in product development," Christian Magoon said in a press conference in Seoul on Wednesday.

"However, we have been in the bull market for nearly 14 years, and now are facing our first correction. I think more products that are defense-natured, focusing on value stocks and higher-quality companies, make sense as for the core investors' portfolio."

Despite the bulging ETF market, local asset managers continue to struggle with regulatory hurdles, blocking them from asset diversification.

Korea’s financial regulators still demand a tight correlation -- a measure of how closely the market price of one ETF follows the market price of another -- for active ETFs, compared to the US. This means that active ETFs here, while designed to operate on decisions made by managers, allow only 30 percent control by the asset manager, with 70 percent passively tracking their underlying indexes. The US market, on the other hand, has no such regulations, allowing managers to allocate portfolios relatively freely, depending on the market climate.

“It may seem simple to abide by the 70-30 rule, but the actual management is not that simple,” Nathan Nam-ki Kim, executive director from Mirae Asset Global Investments’ ETF management business unit, told The Korea Herald.

“Active ETFs require managers to rigorously discover new underlying assets and in-depth research. The rule puts asset managers in a tricky spot.

“For investor protection, regulators should maintain the percentage rule, but must bolster transparency on disclosing how the rule will affect the profitability of a fund and so on, to investors.”