The Financial Supervisory Service (FSS) on the 9th provided key precautions so that investors can accurately understand the product characteristics and risk factors of domestically listed exchange-traded funds (ETFs) and make investment decisions.
Domestic ETFs have established themselves as a means for investors to grow their assets. As of the end of August this year, the net worth of domestic ETFs stood at 232 trillion won, nearly five times larger than five years ago. However, the FSS said that as ETFs with complex structures using options have emerged, accurate understanding has become more important.
The FSS first advised to check not only the distribution rate but also the trend of the net asset value (NAV). For distribution-type ETFs that focus on dividends, an investor's actual profit or loss should be judged by combining distribution payments and gains or losses from changes in NAV. Even if you receive distributions, you can incur investment losses if losses from a decline in NAV exceed the distributions.
In particular, the distribution rate is determined based on the ETF's net asset value on the distribution record date. It is unrelated to the investor's principal. If the ETF's net asset value decreases, the amount received as distributions will also decrease.
Put simply, even if an ETF has a target distribution rate of 20% a year, it does not mean that it will pay a fixed amount relative to the principal, like "put in 100 million won and get 1.5 million won every month" as if it were bank deposit interest.
The FSS also recommended checking the total expense ratio (TER), which sums the ETF's total management fee and other expenses. This is because in many cases other costs involved in running the fund, such as index licensing fees and audit fees, can exceed the total management fee.
The FSS warned that if an ETF's tracking error and premium/discount widen, results different from expectations can occur. Tracking error refers to the difference between the underlying index the ETF follows and the ETF's net asset value (NAV), and premium/discount refers to the difference between the ETF's market prices and NAV. Buying at a high valuation or selling at a low valuation can result in investment losses.
The FSS noted that investors should be aware that ETFs using options, such as covered calls, have advantages and disadvantages depending on market conditions, and advised checking the detailed asset composition (PDF) that specifies the ETF's investment strategy. It also warned that blindly trusting ETFs recommended on YouTube and social media (SNS) can lead to investment losses or leave investors without legal protection.
The FSS said it will closely review investment strategies and investment risks in fund filings so that investors can use ETFs conveniently and usefully in the future, and will work to create a sound environment.