Financial authorities will push to introduce "single-stock leveraged ETFs" and fully active ETFs to broaden choices in Korea's exchange-traded fund (ETF) market. The aim is to close regulatory gaps with global markets such as the United States and Hong Kong and draw the overseas investment demand of Korean retail investors trading U.S. stocks back to the domestic market.
On the 30th, the Financial Services Commission announced that it had issued advance notices for legislation on revisions to the Enforcement Decree of the Financial Investment Services and Capital Markets Act and for rule changes to the Financial Investment Business Regulation, and that it had begun to streamline related laws and Korea Exchange rules.
The core of this reform is allowing the domestic listing of "single-stock ETFs." Until now, domestic ETFs had to consist of at least 10 components, and the weight of an individual component could not exceed 30%. In contrast, in the United States and Hong Kong, ETFs that use a specific stock as the sole underlying asset are actively traded.
Going forward, listings of single-stock ETFs based on domestic blue chips such as Samsung Electronics and SK hynix will be possible, and ETFs and exchange-traded notes (ETNs) applying 2x leverage can also be launched. However, leverage exceeding 3x will be restricted, as in the United States.
The Financial Services Commission (FSC) plans to complete the system overhaul and infrastructure buildout in the first half and roll out products sequentially after reviews by the Financial Supervisory Service and the Korea Exchange.
Given the high risk of these products, investor protections will also be strengthened. Previously, investors had to complete one hour of pre-education to invest in leveraged ETFs and ETNs, but for single-stock leveraged products, an additional one-hour "advanced education" will be required. This will apply equally to overseas-listed products.
In addition, while there is currently no basic deposit requirement for overseas-listed leveraged ETFs, a deposit requirement of 10 million won will be applied going forward, the same as for domestic products.
In addition, to ensure investors clearly recognize that a product is based on a "single stock," a plan to display related wording in the ETF name will be pursued together.
Despite growing demand for dividend-type ETFs, the domestic options market had been criticized as too limited to implement covered-call strategies. A covered call is a strategy in which an investor holds the underlying asset and sells call options to collect premiums, which are then offered as dividends.
To that end, the expirations for KOSPI200 and KOSDAQ150 weekly options will be expanded from "Mon, Thu" to "Mon, Tue, Wed, Thu, Fri," and weekly options and ETF underlying options based on domestic single stocks will also be newly introduced. The related rules will be revised in the first half, with listings pursued sequentially.
Lastly, the introduction of active ETFs without index-linking requirements will also be pursued. Currently, all ETFs in Korea must track a specific index or price. Even active ETFs must follow their underlying index by 70% or more, making fully active strategies effectively impossible.
In major countries such as the United States, fully active ETFs without index linkage already account for more than half. In the United States, 84% of newly listed ETFs last year were active products. Reflecting these points, the Financial Services Commission (FSC) plans to support the National Assembly's legislative process in the first half.