Despite generating excess revenue that beat the market, the TIME U.S. Dividend Dow Jones Active exchange-traded fund (ETF) operated by Timefolio Asset Management will be delisted for failing to meet the correlation coefficient requirement.
Timefolio Asset Management said on the 14th that TIME U.S. Dividend Dow Jones Active is scheduled to be delisted on the 19th for failing to meet the correlation coefficient requirement.
Under current Korea Exchange main board listing rules, active ETFs must maintain a correlation coefficient of at least 0.7 with their benchmark index (BM). If the coefficient stays below 0.7 for more than three months, delisting procedures begin.
TIME U.S. Dividend Dow Jones Active ETF is an active ETF that benchmarks U.S. high-dividend and dividend-growth stocks and is managed by flexibly adding market leaders. It has been run with a strategy of boosting downside protection through dividend stocks and generating excess revenue by adding growth stocks.
The issue arose in May when the ETF added some artificial intelligence (AI) names to create excess performance. As those names spiked in the short term, the correlation coefficient with its underlying index, the Dow Jones U.S. Dividend 100 Index, temporarily fell below 0.7.
After confirming it failed to meet the correlation requirement, Timefolio Asset Management reduced its excess revenue positions and took steps to raise index replication, but it could not dilute the excess revenue within three months and thus entered delisting procedures.
The scheduled delisting date for the ETF is Aug. 19. Accordingly, trading will be halted on Aug. 18, the business day before delisting, and the redemption proceeds for investors will be paid on Aug. 21, two business days after delisting.
Assets held in the ETF will be fully returned in cash to investor accounts based on net asset value (NAV) at the time of delisting. Therefore, there is no risk of forced principal loss arising solely from the delisting.
However, just before delisting, trading liquidity may decline and the premium/discount ratio may temporarily widen, so caution is needed when trading in the market, and note that trading is halted on the day before delisting.
Sim Hyun-su, CIO of equity investments at Timefolio Asset Management, said, "We are deeply sorry for the inconvenience and hassle, such as having to seek alternative products, caused to customers who trusted Timefolio's active management capabilities," and added, "Using this case as a lesson, we will continue to enhance our management and risk-control systems so we can maximize our unique active strength of creating excess revenue while more finely balancing regulatory compliance."