Fees for exchange-traded funds (ETFs) that track Korea's stock indexes are far higher than those for U.S. index ETFs. That shows that the fee-cutting race among large asset managers for U.S. index ETFs has not taken place in Korea's index ETF market. Given that household money flowing in through ETFs has been the key driver of the recent stock rally, individual investors in the domestic market are still bearing excessive expenses.
Household money has poured into the stock market amid the surge that began last year. Many individual investors made net purchases of passive ETFs that track the KOSPI 200 and KOSDAQ 150 indexes.
According to each asset manager on the 4th, the total expense ratios of ETFs that track the U.S. Nasdaq index and the Standard & Poor's (S&P) index offered by the industry's big two, Mirae Asset Global Investments and Samsung Asset Management, are exceptionally low at 0.006% per year, respectively. That is thanks to managers cutting fees so aggressively last year that the Financial Supervisory Service worried about a ruinous price war.
But fees for ETFs that track domestic indexes are much higher. For KOSPI 200-tracking ETFs, the total expense ratio of Samsung Asset Management's "KODEX 200," whose net worth tops 1.4 trillion won, reaches 0.15% per year. Mirae Asset Global Investments' "TIGER 200" is not low either at 0.05%, but KODEX 200 is twice as expensive.
The fee burden is even heavier for ETFs that track the KOSDAQ 150 index. The total expense ratio of "KODEX KOSDAQ 150" is 0.25% per year, and "TIGER KOSDAQ 150" is as high as 0.19%. That is why there is criticism that the domestic flagship index products most favored by retail investors are serving as cash cows for asset managers.
Over the past few years, as the ETF market surged, large asset managers fought to attract investors by setting fees even slightly lower than rivals. In particular, fees dropped dramatically for U.S. index-tracking ETFs that drew a flood of individual investors.
By contrast, such competition has gone missing in the domestic index ETF market. As a result, the absolute level of fees on domestic index products remains high, and even the fee gap among large managers has not narrowed and remains wide.
For normal market competition to occur, those with higher fees should respond by cutting expenses below rivals. But Samsung Asset Management is maintaining fees at roughly three times those of Mirae Asset Global Investments. With the top player avoiding price competition, the fee-cutting trend in the domestic flagship index ETF market has been choked off.
In the industry, the view is that Samsung Asset Management is not proactive about cutting fees on domestic index ETFs "because of group considerations." The analysis is that these products serve as stable channels for managing money from the group's financial affiliates, so there is no need to slash fees in a self-defeating way to attract individual money.
In fact, passive ETFs that track the KOSPI 200 index had long been dominated by institutional money. In particular, for KODEX 200, a significant share was devoted to managing funds flowing in through Samsung Life Insurance's variable insurance. According to the industry, the size of KODEX 200 ETFs held by the Samsung Life Insurance variable insurance account is estimated at 700 billion to 80 billion won.
Until a few years ago, individuals held a smaller amount of the ETF than Samsung Life Insurance held through variable insurance. But the situation changed after last year's sharp rally in the domestic market. As of late Jan., individuals' holdings of KODEX 200 reached 4.6 trillion won, more than six times Samsung Life Insurance's holdings.
While ETF fees seem small on an annual basis, they can significantly affect returns over the long term through compounding. An industry official said, "For the level of expenses borne by investors to come down, large firms need to compete, but that competition is muted for domestic index ETFs," adding, "It is an ironic structure in which those investing in Korea's market via ETFs bear higher expenses than those investing in the U.S. market."
Regarding this, Samsung Asset Management said, "The returns of domestic index ETFs, including total expense ratios, are high, and ETF management, including premium-discount rates, is being carried out stably."