On the 27th, eight asset management companies will simultaneously launch single-stock leveraged exchange-traded funds (ETFs) for Samsung Electronics and SK hynix. Investors are focusing on each manager's strategy.
In particular, Samsung Asset Management and Mirae Asset Global Investments, which are fiercely competing in the ETF market, are rolling out the same single-stock leveraged ETFs but with differences in creation and redemption methods. Samsung Asset Management chose the "in-kind subscription method," while Mirae Asset Global Investments chose the "cash subscription method."
Samsung Asset Management plans to cut expense such as the security transaction tax through the in-kind subscription method. By contrast, Mirae Asset Global Investments emphasized operational flexibility with the cash subscription method.
In the ETF market, when investment money floods into one product, the price premium or discount widens. To manage that gap, new ETFs must be issued in line with demand, and the roles of liquidity providers (LPs) and managers are crucial at this point. An LP buys the constituents of the ETF and hands them to the manager, and the manager receives them, creates new ETF units, and delivers them to the AP. When the LP sells these in the secondary market, the number of ETF units increases. Redemptions work in reverse.
Samsung Asset Management said it adopted the in-kind subscription method for leveraged products for the first time in the industry. If designed using the existing cash subscription method, there is a step where stocks are sold and cash is exchanged. Samsung said brokerage fees and the security transaction tax arise in this process, passing the expense on to investors. Samsung added that exchanging stock in kind instead of cash in the market can reduce this burden.
Lim Tae-hyeok, head of ETF management at Samsung Asset Management, said, "With this stock in-kind subscription design, we expect to cut trading costs by about 1.1% to 1.4% per year."
An industry official said, "Samsung Asset Management has been building competitiveness in leveraged ETFs, and based on that experience, it appears to have designed a single-stock leveraged ETF using the in-kind subscription method," noting, "There are many advantages in terms of expense and operations."
Mirae Asset Global Investments chose the cash subscription method. It said that adopting the in-kind subscription method does not eliminate the security transaction tax and that the tax is shifted to LPs. If such a burden falls on LPs, the bid-ask spread (the gap between the bid and ask) could widen and actually increase the premium or discount.
Lee Jeong-hwan, an executive director at Mirae Asset Global Investments, said, "With the in-kind subscription method, when the manager gives stock in kind to LPs, LPs must sell the stock in kind, and the security transaction tax arises in that process," adding, "By contrast, with the cash subscription method, when the manager gives cash to LPs, if the stock in kind is undervalued, they acquire the stock in kind, and if futures prices are undervalued, they acquire futures, allowing for greater operational discretion."
However, Samsung Asset Management has already secured 25 authorized participants (APs) and 15 LPs and plans to tighten the bid-ask spread through ample supply.
Both companies are launching in-kind leveraged products, but their mix of cash equities and futures differs. Samsung Asset Management designed nearly identical weights of 90% to 110% in cash equities and 90% to 110% in futures. By contrast, Mirae Asset Global Investments set 80% to 100% in cash equities and 100% to 120% in futures, giving a higher weight to futures.
Total management fees are higher at Samsung Asset Management. The total fee for Samsung Asset Management's single-stock leveraged financial product is 0.29% per year, about 20 basis points higher than Mirae Asset's 0.0901% per year.