With their low fees and ability to give investors access to indices and market sub-categories in one hit, ETFs have expanded rapidly over the past 20 years.
Retail investors in South Korea are increasingly switching to
exchange-traded funds from mutual funds, tapping into how ETFs
have become more customised, according to a report.
Even though broad fund assets under management fell 5.8 per cent
last year to KRW341 trillion ($269.3 billion) from a year
earlier, only mutual funds took a hit. In 2022, ETFs’ AuM
actually rose 6.1 per cent, Cerulli Associates said in a report.
With their low fees and ability to give investors access to
indices and market sub-categories in one hit, ETFs have expanded
rapidly over the past 20 years. Since central banks opened the
monetary taps in the 2008/09 financial crash, equity and bond
markets rose, undermining the attractions of traditional actively
managed funds. And ETFs are also available in “smart-Beta” forms
where specific sources of return, such as yield, momentum and
pricing power, are unpacked and captured indices that ETFs can
track.
The report by Boston-based Cerulli said a factor supporting this
rise in South Korean ETF’s AuM was that the country has eased ETF
regulations. In July 2022, bond-type ETFs with expiry dates were
permitted by Korea Exchange, opening the ETF space to many bond
funds that were previously only permissible within mutual fund
structures.
In July 2022, the Korea Exchange revised rules to introduce new
ETF products, reduce disclosure obligations, and improve the
listing review regulation system for ETFs, exchange-traded notes,
and equity-linked warrants.
The exchange has launched indices such as KOSPI USD Spot Index
(May 2023), KRX Gold Spot Leverage Index (August 2022), KRX REITs
Top 10 indices (May 2022), KOSPI 200 Top 10 Index and KOSPI 200
Top 10 Leverage Index (June 2021), and F-KTB5 Duration Following
indices (June 2021). It has also allowed the opening of the
three-month KOFR Futures Market.
Further ETF rule relaxations are expected, the report said. In
May this year, the president of the Korea Financial Investment
Association (KOFIA) reportedly said that he plans to endorse the
easing of ETF regulations in line with international standards
and provide tax-free benefits to long-term investors in public
offering funds.
There were 139 new ETF launches in 2022. The highest net inflows
were to Samsung KODEX KOFR Active ETF (Synth), at $2.4 billion in
2022. Other ETF launches in 2022 were in technology sector
equity, cautious allocation multi-asset, Korea equity, and US
equity large-cap blend.
In late 2022, highly concentrated portfolios with a new strategy
of mixing bonds with single stocks such as Nvidia and Tesla were
launched.
“Despite the broad trend into ETFs in 2022, Cerulli finds that
active mutual funds with good international brands and
performance are still in high demand,” Soo Ah Ran Cho, associate
director, Cerulli, said. “For example, US equity funds and
technology sector equity have seen high net inflows. The thematic
investment boom that started in 2020 is continuing in 2023 in
more concentrated, high-conviction portfolios. Retail investors
are looking for medium-to-long-term themes such as the fourth
industrial revolution, and asset managers should be able to
capitalise on these opportunities.”
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