Value-up ETP index standard questioned ahead of launch

Korea Exchange (KRX) CEO Jeong Eun-bo, center, holds a copy of a signed memorandum with financial industry leaders at the exchange headquarters in Yeouido, Seoul, Thursday. Yonhap

The success of Korea Value-up Exchange-Traded Products (ETPs) set for Nov. 4 launch remains uncertain, clouded by overall stagnant investor enthusiasm and questionable standard on the makeup of the underlying asset index, market watchers said Friday. Included in the derivative products are exchange-traded funds (ETFs) and exchange-traded notes (ETNs). The products are part of the government-led Corporate Value-up initiative outlined to resolve chronic undervaluation of Korean stocks, often termed “Korea discount.”

Advancing the pessimism are high price-to-book (PBR) and high-return-on-equity (ROE) ratios of most of the Korea Value-up Index stocks, qualities shunned by institutional investors that favor undervalued low-PBR shares to operate their passive portfolio ETFs. Passive funds operated primarily by pension funds are low-risk, low-return and low-cost, compared to active ones embraced by risk-on asset managers and brokerages.

Also factored into the underwhelming index since its Sept. 30 introduction is a lack of consideration for the long-term strategies and corporate governance of the participating firms overshadowed by short near-term strong performance. Examples of firms excluded despite market expectations are KB Financial Group, POSCO, and KT.

“Whether the derivatives will be as successful as intended remains doubtful,” an industry observer said on condition of anonymity.

“Concerns linger over the index and the launch of new products tied to the performance of the questionable underlying asset raises eyebrows.”

The assessment followed Thursday’s announcement by the Korea Exchange (KRX) of the launch of ETPs totaling 510 billion won ($425 million).

The products will invest in the Value-up Index stocks as well as those that have announced measures to bolster growth strategies despite not having made the index.

The 510 billion won will be sourced in part from over 250 billion won in Value-up Fund put up by the bourse operator and the Korea Financial Investment Association (KOFIA), representing the domestic capital market players.

They signed a memorandum of understanding Thursday to establish the fund encompassing privately raised funds of over 200 billion won and 100 billion won from brokerages.

The 510 billion won comprises 12 ETF products including nine passive and three active funds as well as ETNs.

Major asset management affiliates of Mirae Asset, Samsung and Korea Investment will individually manage between 204 billion won and 30 billion won. Over two dozen brokerages will join as liquidity providers.

This is far larger in scale compared to Japan’s similar index, JPX Prime 150. The Japanese index has two ETFs with initial assets under management of 18.4 billion won.

KRX CEO Jeong Eun-bo said similar indices will be rolled out, reflecting the needs of market participants. Also in the picture are tax benefits for ETF investors.

Meanwhile, investor enthusiasm remains low, as indicated by over two-thirds, or 68, out of the 100 Value-up index stocks registering a decline in value since Sept 30.

Among them are Samsung Electronics, Hyundai Motor and its sister firm Kia, as well as Celltrion. They logged drops of between 12 percent and 3 percent.

Only Korea Zinc surged 117 percent over the same period, not because of the government initiative but an ongoing buyout feud with an alliance of Young Poong and MBK Partners over the control of the zinc smelter.

So far, only 26 firms have announced plans to align with the government initiative. They are part of around 60 firms that have plans for announcement.