ETFs a growing fad for local investors

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ETFs a growing fad for local investors

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Unlike mutual funds, which peaked in 2008 and have been on the decline ever since, exchange-traded funds have been on a consistent upward trajectory in Korea since they first appeared in October 2002, growing 30-fold in one decade.

An ETF is a pool of investments that track a broader index, such as the Kospi, and can be tied to a basketful of assets or a commodity like gold. What makes them different from other mutual funds is that they can be traded on an intra-day basis. This makes them more akin to stock trading, meaning they can be bought and sold online at home or via a visit to a brokerage. They can also be bought short to profit from subsequent price drops.

Internationally, the first ETF, the SPDR Standard & Poor 500, was listed on the New York Stock Exchange in 1993. This was created after 73-year-old Nathan Most, then head of product development at the American Stock Exchange, watched raw materials trade as warrants and came up with the groundbreaking new idea.

The global market was tepid for a few years then mushroomed from 100 ETFs worth around $74.3 billion in 2000 to 3,200 worth $1.5 trillion now.

Growth in Korea has been even more steroid-fueled, jumping from four ETFs with total net assets of 344.4 billion won ($291.9 million) to 121 different issues worth in excess of 11 trillion won this year, to emerge as a new trend.

In the early days, most ETF products in Korea were linked to the Kospi, which follows the movement of the 200 largest companies in the country. They later diversified to focus on specific industries, or track foreign indexes, raw materials or bonds.

In 2009, inverse ETFs were developed as vehicles that move in the opposite direction of their linked index.

One year later, leveraged ETFs were created with the hook that they can potentially double the value of the underlying index by pairing investor capital used with investor debt. The downside is that management costs make the “double profit” claims unrealistic, while the potential losses also multiply by the same factor.

The number of ETF trades taking place on the Kospi clearly reflects their popularity. In 2002, they accounted for 1.1 percent of total trades, but now make up around 8.8 percent of all movement on the bourse.

But as such trades increase, so do fears that they may distort the market. The SPDR Gold Trust, the world’s second-biggest ETF, is a case in point. Its immense holdings of 1,300 tons of gold, or total assets worth $68.5 billion, have led some analysts to claim gold has turned from a traditional safe haven into a speculative asset. The trust’s stockpile puts it second only to those held by the central banks of the U.S., Germany, Italy and France.

In Korea, the threat of distortion comes largely from the dominance of a single company, Samsung Asset Management. Samsung controls over 50 percent of the ETF market, while it and three other companies - Mirae Asset, Korea Investment Management and Woori Asset Management - together own 94 percent.

This oligopoly has led to high transaction costs that undermine the main selling point of ETFs, which originally gained popularity for their low trading costs that are typically below half of those charged by mutual funds.

In contrast to the low fees of foreign ETFs - those linked to the S&P500 often charge as little as 0.1 percent - local ETFs tied to the Kospi average around 0.3 percent.

Responding to criticism of its high fees, Samsung promised it would lower its rates to 0.79 percent from 0.93 percent starting next month for its Kodex Leverage ETF and Kodex Inverse ETF.

Now more foreign investors are tipping actively-managed ETFs as the future of the market. These can deviate from the benchmark index as the fund manager sees fit, making them less predictable than regular ETFs but with higher potential gains.

“Rather than launching similar products to try and catch up with other asset managers, we are going to focus on developing actively managed ETFs,” said Chung Chan-hyoung, CEO of Korea Investment Management.

By Ko Ran [jbiz91@joongang.co.kr]
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