As Korea's exchange-traded fund (ETF) market has surpassed 500 trillion won, a wave of ETFs are being delisted for failing to meet standards. In particular, as cases emerge of ETFs being forced out due to regulations despite posting returns that beat their benchmarks, calls are growing for system improvements.
According to the Korea Exchange (KRX) and the financial investment industry on the 24th, 11 ETFs were delisted this year. In addition, three ETFs from Korea Investment Management — "ACE TDF2030 Active Qualified," "ACE TDF2050 Active Qualified," and "ACE TDF Long-term Asset Allocation Active" — are set to be suspended from trading and delisted in early next month, bringing the year-to-date total of delisted ETFs to 14.
These three ETFs scheduled for delisting are being forced out after the "correlation coefficient" between their benchmark indexes fell below the standard of 0.7 for three consecutive months.
The issue is that the asset manager running the ETFs picked stocks well and delivered returns higher than the benchmark, but the widening divergence in the correlation coefficient led to delisting.
ACE TDF2030 Active Qualified, ACE TDF2050 Active Qualified, and ACE TDF Long-term Asset Allocation Active have each posted excess returns of 2.80%, 6.64%, and 9.74%, respectively, over their benchmarks as of June 21 this year since listing.
Typically, ETF delistings occur due to weak transactions in small funds, such as "total net worth aggregates under 5 billion won for one year after inception." Previously, the ACE FTSE WGBI Korea ETF was voluntarily delisted by the manager because its total net worth aggregates did not reach 5 billion won for one year after inception. KIWOOM Global Future Mobility, KIWOOM U.S. Industry STOXX, KIWOOM China A50 Connect MSCI, and KIWOOM Fn Gene Innovation Technology ETFs from Kiwoom Asset Management were also delisted for the same reason at the manager's choice.
However, the three ETFs set to be delisted have a combined net worth of 100 billion won.
Regarding the delisting of the three active ETFs, a Korea Investment Management official said, "Amid heightened market volatility due to Middle East geopolitical tensions, we adjusted asset allocation, and as the weight of domestic stocks expanded, the gap between the portfolio and the benchmark widened," adding, "As a result, the correlation coefficient fell below the standard of 0.7 for about three months, leading us to proceed with the delisting process."
Unlike "passive ETFs (correlation coefficient standard 0.9)," which replicate the underlying index as is, the essence of an "active ETF" is to generate excess revenue over the benchmark. When investment returns far exceed expectations and significantly outperform the benchmark, the correlation coefficient, which indicates synchronicity with the index, paradoxically drops below 0.7.
In fact, other active ETFs such as "ACE Apple Value Chain Active" and "TIME Global Top Pick Active" are also delivering high levels of excess returns over their benchmarks, yet frequently fall short of the correlation coefficient threshold.
Since listing, ACE Apple Value Chain Active has posted an excess return of 26.30% over its benchmark through the 21st of this month. TIME Global Top Pick Active has also recorded an excess return of 12.61% over its benchmark from listing through the 21st of this month.
Within the industry, criticism is mounting over the rigidity of the "correlation-coefficient-linked delisting rule." In advanced global markets such as the United States and Europe, there is no system that forces delisting of active ETFs even if their correlation coefficient declines or tracking error widens, but in Korea, the critique is that uniform regulations are applied based on ETF guidelines that do not account for active characteristics.
An official at an asset management company said, "Even if an active ETF manager selects leading market stocks well to boost investment returns and deliver excess revenue, if the gap with the benchmark widens, the manager instead has to worry about delisting," adding, "ETFs that have delivered better-than-expected gains to investors are being forcibly terminated due to closed-off regulations, causing investors to be forced to cash out at unwanted times and suffer losses."
Another asset management company official said, "For Korea's ETF market, which has entered the 500 trillion won global era, to achieve qualitative growth commensurate with its quantitative expansion, it is desirable to abolish the rigid correlation coefficient regulation for active ETFs."