Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
Active ETF to thrive in Korea?
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By Anna J. Park
By Anna J. Park
Korea's very first stock-based active exchange-traded fund (ETF) operated by human fund managers made its listing at the benchmark KOSPI market on Thursday. Samsung Asset Management's KODEX K-Innovation Active ETF is a hybrid of passive ETF and active fund products; 70 percent of its assets follow indices ― just as passive ETF products do ― while 30 percent of its investment items are freely picked up by fund managers.
According to Samsung Asset Management, the ETF invests 70 percent of its asset by tracking FnGuide's K-innovation index, and the remaining 30 percent is invested in dozens of stock items selected by its research center and fund managers.
“The company hopes our ETF product becomes a forerunner in the nation's active ETF market,” an official from the firm said.
Unlike the U.S. where active ETF products are enjoying huge popularity and high profit returns, Korea is still very much unfamiliar with the financial products due to many layers of regulations that existed until recently. While bonds-based active ETFs began to be allowed in Korea since 2017, stock-based active ETFs only became possible in July this year.
In late September, two stock-based active ETFs were listed in the Korean stock markets ― Mirae Asset Global Investments' TIGER AI Korea Growth Active ETF and Samsung Asset Management's KODEX Innovative Tech Active ETF ― yet their portfolios are operated by AI-based programs. Korea's stock-based active ETFs should maintain their correlation coefficient with related indices at 0.7 ― meaning that only less than 30 percent of the assets are up to fund mangers' discretion.
Market insiders say it's not easy to make extraordinary results with only 30 percent of assets under management (AUM) allowed at fund managers' full discretion, suggesting the financial authority loosen up the inflexible regulation on active ETFs for the market to grow further.
“Active ETFs have more autonomy in their operation, compared to index-tracking ETFs that should maintain correlation coefficient with indices at 0.9. However, 0.7 is still high, leaving very little room to operate to yield excellent results,” a market insider familiar with the topic said.
In the U.S., active ETFs are thriving, as witnessed in the total size of active ETFs' AUM standing at around $157 billion, as of the end of last month. This is almost 20-fold growth in just 12 years since active ETFs were introduced in the U.S. in 2008 with only about $8 billion in AUM at the time.
This year alone, nearly 50 percent of 250 newly listed ETFs in the U.S. stock markets are active ETFs. The U.S. market does not have regulations about active ETFs keeping a certain correlation coefficient with tracking indices. It also allows active ETFs to be “nontransparent,” meaning their portfolios could be disclosed a month or quarter later.
The most popular and successful active fund cases are Ark Investment's various ETFs, including ARK Genomic Revolution, ARK Next Generation Internet and ARK Innovation, which have recorded over 150 percent returns this year. Their stellar profit returns attract local retail investors to put their money into these overseas products.
“In November, 1.1 trillion won ($990 billion) worth of AUM was drained out of local mutual funds, while more than 1 trillion won of money was flown into overseas stock-based funds,” Oh Gwang-young, an analyst from Shinyoung Securities, wrote in his recent report.
With their fund fee lower than mutual funds and slightly higher than passive ETFs, active ETFs are expected to grow more, meeting needs of local retail investors who both seek stable and high returns on investment. This new products also seem to complement the country's shrinking mutual fund markets due to a number of cases of mis-sellings of problematic funds in the country.