While the number of exchange-traded funds (ETFs) has surpassed 1,000 in products and is experiencing rapid growth, the exchange-traded note (ETN) market is stagnant. The securities industry is trying to attract investors' interest by launching new products based on leverage that can expect high returns, but ETNs have not been drawing attention.
The industry expects that if ETNs become products included in retirement pensions, it could be a breakthrough that revitalizes the market. Consequently, the industry is calling for revisions to the relevant standards to allow ETNs to be included in retirement pensions like ETFs. They argue that regulatory improvements are necessary to align with ETFs, which have similar revenue structures and risks. However, discussions on this matter remain sluggish.
According to the securities industry on the 5th, demands for the inclusion of ETNs in retirement pension products are intensifying again. With the sluggishness of the ETN market and discussions underway to improve retirement pension revenues, voices are growing that now is the appropriate time for regulatory improvements.
The retirement pension reserves have surpassed 178.6 trillion won, indicating that there could be a channel to escape the stagnation of the ETN market.
Unlike ETFs, which have similar product structures, ETNs are not included in retirement pension products because they are classified as derivative-linked securities. Under current regulations, derivative-linked securities with a maximum loss ratio exceeding 40% cannot be included in retirement pension products. However, excluding the credit risk of securities firms, the revenue structure of ETNs does not differ significantly, prompting the securities industry to demand regulatory improvements.
Both ETFs and ETNs are products that link returns to underlying assets. However, the issuing entities differ. ETFs are issued by asset management companies, while ETNs are issued by securities firms. As a result, there are differences in credit risk. ETFs have no credit risk because asset management companies store assets with a separate trust institution, whereas ETNs entail credit risk due to being issued on the credit of the securities firm.
Excluding credit risk, the differences between the two products are not substantial, but there is a significant gap in investor interest. As of last month, the number of ETF products has exceeded 1,000, enjoying a boom, while the number of ETN products stands at just 390. With a decrease in the launch of new products and occurrences of early liquidation and delisting, the number of products, which was 412 last year, decreased to 381 as of June.
An official from the securities industry noted, "ETN products are primarily issued by large securities firms that carry no risk of default, so there is practically no difference in loss risk compared to ETFs," adding, "ETNs could contribute to improving revenue if included in retirement pension products because they allow for more diverse strategies than ETFs."
The government has also begun preparing measures to improve retirement pension revenues, but discussions about the inclusion of ETN products are stagnant. An ETN manager at a large securities firm said, "We have been demanding the inclusion of ETNs in retirement pension products through the Korea Financial Investment Association since last year, but we have not received any substantial responses," and added, "It seems that the recent restructuring by financial authorities has stalled discussions."
A financial authority official stated, "Discussions on improving the low revenue of retirement pensions are ongoing, but concrete measures have not yet been finalized," and added, "There are no new discussions regarding the entry of new products into retirement pensions."
It is not impossible to manage retirement pensions with ETNs. Securities firms have entered the retirement pension market by launching 'loss-limiting ETNs' that reduce past loss rates. However, these products struggle to fully utilize the characteristics of ETNs, leading to a significant decline in investor interest.
Among retirement pension products, there is only one ETN based on gold spot from Mirae Asset Securities. Daishin Securities added loss-limiting ETNs to retirement pension products in 2023, but due to poor trading volume, trading was halted within a month.
A representative from Mirae Asset Securities explained, "Loss-limiting ETNs must have complicated names due to regulations, and investors cannot even discern that the information about loss limitation is in the product name, which makes it hard to read, leading to decreased appeal."