Deborah Pher, founder of ETFGI - MBA in Management from the University of Connecticut, MBA from Northwestern University's Kellogg School of Management, former Vice Chair of the Nasdaq Listing Committee, former Global Head of ETF Research at BlackRock, former Head of the Investment Strategy Group at Morgan Stanley /Courtesy of ETFGI

Korean investors tend to show more interest in thematic or sector-based ETFs. If investing only in a specific sector or theme, they cannot enjoy the benefits of diversification if that theme loses popularity. Investors in the U.S. and Europe invest in broader markets, such as the S&P 500 ETF.

Deborah Purr, founder of ETFGI, emphasized diversification during a video interview on Dec. 2. Purr is an expert who has studied ETF management and investment strategies for over 30 years since the early days of the global ETF market. She has been responsible for ETF research at global asset management firms like BlackRock and Morgan Stanley, and served as the vice chair of the Nasdaq Listing Committee. In 2012, she founded the research company ETFGI, which studies the global ETF ecosystem and analyzes the flow of funds and market trends related to ETFs. The following is a Q&A.

The growth of the ETF market.

Global ETF investments recorded net inflows for 65 consecutive months until October 2024. This means that for 65 straight months, the funds flowing into ETFs exceeded those flowing out, which is quite unusual. Looking at global mutual fund investments, several net outflows occurred during the same period. There is an increasing preference for ETFs globally, with investors putting more funds into them. This year, net inflow amounts for ETFs have reached record figures in nearly every region around the world.

ETFs are simple, transparent, and cost-effective. They are unique in that all types of investors share the same minimum investment scale and pay the same fees. Generally, individual investors face higher fees while institutional investors manage large funds, resulting in lower fees compared to individuals. Pension funds, fund managers, hedge funds, and individual investors are all investing in ETFs. Additionally, ETFs enable easy investments in various markets, sectors, themes, commodities, and even cryptocurrencies across the world. ETFs are among the most democratic investment products.

Looking at annual net inflows into ETFs, the figures dropped after 2021 but set a new record this year.

In 2021, it is interpreted that net inflows surged unusually due to the impact of the COVID-19 pandemic. As people's lives were disrupted, they spent more time at home, leading them to reconsider their asset portfolios. They recognized various types of ETFs, resulting in annual net inflows reaching their peak. In fact, it was found that among investors who participated in the stock market in 2021, 15% were first-time investors that year. Similar situations appeared to have also occurred in other countries. In the long term, ETFs have been steadily gaining popularity for years.

What innovative ETFs have been seen recently?

In the U.S., buffer ETFs have emerged as innovative products attracting attention. These products compensate for losses that exceed a predetermined range instead of capping profits. ETF products that employ such an options strategy are gaining popularity, and various products, including ETFs that exclude certain stocks from the S&P 500, have come into the market. Moreover, in January 2024, the U.S. Securities and Exchange Commission (SEC) approved the first Bitcoin spot ETF, drawing market attention to cryptocurrency ETFs. In July, the SEC also approved Ethereum spot ETFs. The 'iShares Bitcoin Trust ETF (IBIT)' saw inflows of $26.14862 billion (approximately 36.5793 trillion won) from January to October this year.

Will the popularity of cryptocurrency ETFs increase under the Trump administration 2.0?

President-elect Donald Trump has supported cryptocurrencies, but that doesn't guarantee that the prices of cryptocurrencies will continue to rise. Moreover, Trump has a tendency to make unexpected remarks or actions, which could create further volatility in the market. It remains to be seen what situation will unfold under the Trump 2.0 administration.

Then, what ETF would you recommend to Korean investors?

If I had to pick one, it would be to buy an ETF that tracks the S&P 500 for U.S. investment. Korean investors tend to show more interest in thematic or sector-based ETFs, while investors in the U.S. and Europe invest in broader markets like the S&P 500 ETF. Another widely invested product for diversification is the Nasdaq 100, Morgan Stanley Capital International (MSCI) World, MSCI All Country World Index (ACWI), FTSE World, FTSE Developed Markets, and FTSE Emerging Markets.

A primary investment method for European investors is to invest in the U.S. through the S&P 500 or Nasdaq 100, while also adding their country’s representative stock index, like the German DAX. Investing in one's own country is a very common occurrence. It would be appropriate to add a Korean stock market ETF alongside the S&P 500 ETF.

What is the growth outlook for the ETF market?

Globally, the ETF market is expected to continue growing. In many Middle Eastern and African countries, the first ETFs are being introduced. For instance, in October this year, ETFs tracking Hong Kong and Chinese stocks were each launched in Saudi Arabia. Furthermore, the younger generation has a strong tendency to engage in investing without relying on others. Among the younger population, DIY investment (Self-Directed Investing) is on the rise. This development will expand the influence of ETFs, which are simple investment products. In the U.S., ETFs are perceived as superior products compared to mutual funds, and this preference is extending to other regions.

Plus point

Emergence of buffer ETFs that compensate for investment losses

Buffer ETFs are rising in the U.S., the world’s largest ETF market. According to Morningstar, as of August 2024, there are a total of 327 buffer ETFs in the U.S. Their asset scale is estimated to be $54.8 billion (approximately 76.6597 trillion won), showing steep growth compared to just 73 products with assets of $4.6 billion (approximately 6.4349 trillion won) in August 2020.

Buffer ETFs are products that protect against losses while sacrificing some upside performance. As the name suggests, they are ETFs with a buffer. For example, if a product has a loss compensation ratio of 10%, it can protect the principal until the underlying index falls by 10%. If the underlying index falls by 15%, a loss of 5% is incurred. However, there is also a limit to the returns, which makes them less favorable during bull markets. They are suitable for conservative investors with a risk-averse tendency. The structure utilizes call options and put options to establish caps and buffers.

A representative buffer ETF product is the 'Innovator U.S. Equity Power Buffer ETF (PJAN)', which is based on the S&P 500. The cap on returns is 14.24%, and the loss compensation ratio is 15%. In July, BlackRock also launched the buffer ETF 'iShares Large Cap Maximum Buffer ETF (MAXJ)' based on the S&P 500, with a return cap of 10.64% and a loss compensation ratio of 100%.

Buffer ETFs typically have a maturity period of one year, and the cap on the upper end of returns and the buffer rate on the lower end are newly determined on an annual basis. This means that the conditions established for the upper and lower returns at the time of issuance are maintained for 12 months; hence, if purchased at a high price during the maturity period, the cap may decrease, and loss compensation may not function properly. Buffer ETFs tend to have higher fees than regular ETFs. According to Morningstar, the average fee for regular ETFs is 0.51%, while for buffer ETFs, it is 0.8%.