The net worth of domestic listed exchange-traded funds (ETFs) has surged to nearly 50 trillion won in one year. This is attributed to a concentration of investors in overseas stock-type and thematic ETFs. However, it has been suggested that issues of repeated ETF launches and delistings within limited liquidity need to be addressed.
Participants at a seminar on the changes and development directions of the ETF market, hosted by the Korea Capital Market Institute and the Korean Derivatives Association on the 19th at the Korea Financial Investment Association Center in Yeouido, Seoul, expressed this opinion.
According to the Korea Capital Market Institute, the domestic ETF market has been rapidly growing. Following an increase from 80 trillion won in 2022 to 120 trillion won in 2023, it is currently hovering around 170 trillion won this month. In just this year, 162 ETFs have been newly listed, bringing the total to 929 products being traded on the domestic stock market as of that day.
With the increase of retail investors focusing on U.S. stocks, growth continues around overseas stock-type ETFs. Currently, individual investors' holdings of overseas stock-type ETFs are nearly three times that of domestic stock-type ETFs.
The introduction of leveraged, inverse, and thematic ETFs with high volatility following index-tracking products has energized the market. Kwon Min-kyung, a researcher at the Korea Capital Market Institute, said, "Individuals tend to prefer new ETFs that have performed well over the past month."
It is also experiencing growing pains. As competition among asset management companies intensifies, they are cutting fees and launching new ETFs. During this process, funds are consolidating into a few large ETFs, while small ETFs are entering the process of voluntary delisting. The number of voluntary delistings in the domestic ETF market has increased from 14 last year to over 50 this year.
While there is a perspective that filtering good products from bad in the ETF market is taking place through voluntary delisting, it may unintentionally create a tax burden for investors. Profits realized from ETF delistings are treated as deemed dividends, subjecting investors to dividend income tax. If the amount is substantial, it could fall under the comprehensive taxation of financial income.
Above all, there are opinions that frequent ETF delistings could hinder long-term investment. Kang Byeong-jin, a professor at Sangmyung University's Department of Finance, noted during a panel discussion that "ETFs should be products for long-term investment," adding, "To achieve this, we need to build trust that ETFs will still be meaningfully traded in five or ten years."
Kim Min-ki, a researcher at the Korea Capital Market Institute, proposed the idea of rebranding ETFs that are seeing diminished demand. According to Kim, current regulations at the Korea Exchange do not allow for changes in the underlying index to be reflected in listing changes. In contrast, in the United States, changes to the underlying index can be made if approved by the Securities and Exchange Commission (SEC), with prior disclosure. Kim stated, "It would be nice to establish a procedure for changes in the underlying index, with the approval of financial authorities, without changing the essential characteristics of the ETF."
There were also opinions that asset management companies should develop ETFs based on a wider variety of underlying indices. If the tracking indices are limited and similar ETFs using the same index become numerous, delistings will inevitably increase. Kim Do-hyung, head of ETF consulting at Samsung Asset Management, said, "If a latecomer asset management company encounters a representative index ETF, it will be relatively disadvantaged," and suggested that introducing ETFs that embody their unique characteristics could lead to more vibrant competition.
There were also claims that the role of liquidity providers (LPs) is crucial for liquidity in the ETF market. Park Jung-heon, head of passive management at Mirae Asset Securities, stated, "LPs contribute to ensuring that the quotes for ETFs are tight," adding that "each LP will continue to enhance its capabilities and strengthen internal controls to foster a healthy ecosystem."