The overall trend in retail subscriptions to mutual funds in Korea is shifting gradually toward ETFs, as exchange-traded offerings have become more tailored and customised to retail needs, reveals Cerulli Associates.
The firm writes that although broad industry fund assets under management (AUM) declined 5.8 per cent to reach KRW341.0 trillion (USD269.3 billion) in 2022 from KRW361.9 trillion in 2021, this decline was only from the long-term mutual fund side, at 8.9 per cent, which was offset by the 6.1 per cent AUM increase in ETFs.
One of the factors supporting this AUM increase was a relaxation of ETF regulations, which led to diverse product innovations that were timely in meeting retail and institutional demands, Cerulli writes. These include ETFs tracking new underlying indices that are not usually tracked, hybrid ETFs centred on a single stock, and maturity-matching bond ETFs with lifespans. In July 2022, bond-type ETFs with expiry dates were permitted by Korea Exchange, opening the ETF space to many bond funds that were previously only permissible within mutual fund structures.
In July 2022, the Korea Exchange revised rules to introduce new ETF products, lower disclosure obligations, and improve the listing review regulation system for ETFs, exchange-traded notes, and equity-linked warrants.
Over the last two years, it launched indices such as KOSPI USD Spot Index (May 2023), KRX Gold Spot Leverage Index (August 2022), KRX REITs Top 10 indices (May 2022), KOSPI 200 Top 10 Index and KOSPI 200 Top 10 Leverage Index (June 2021), and F-KTB5 Duration Following indices (June 2021). It has also allowed the opening of the three-month KOFR Futures Market. These launches and trading facilities have allowed many innovative ETFs to come to the market, Cerulli says. Further ETF rule relaxations are expected—the president of the Korea Financial Investment Association (KOFIA) stated in May 2023 that he plans to endorse the easing of ETF regulations in line with international standards and provide tax-free benefits to long-term investors in public offering funds.
There were 139 new ETF launches in 2022. The highest net inflows were to Samsung KODEX KOFR Active ETF (Synth), at USD2.4 billion in 2022. Other ETF launches in 2022 were in technology sector equity, cautious allocation multi-asset, Korea equity, and US equity large-cap blend.
In late 2022, highly concentrated portfolios with a new strategy of mixing bonds with single stocks such as Nvidia and Tesla were launched and have performed very well due to the timely introduction and recovery of some technology names, Cerulli writes. KIM ACE NVIDIA30 blend Bloomberg ETF and Mirae Asset TIGER Tesla Balanced ETF, accumulated KRW31.2 billion and KRW53.2 billion since their inception on Nov. 29, 2022 to May 18, 2023, recording 2023 year-to-date returns of 35.8 per cent and 19.8 per cent, respectively.
“Despite the broad trend into ETFs in 2022, Cerulli finds that active mutual funds with good international brands and performance are still in high demand,” says Soo Ah Ran Cho, associate director, Cerulli. “For example, US equity funds and technology sector equity have seen high net inflows. The thematic investment boom that started in 2020 is continuing in 2023 in more concentrated, high-conviction portfolios. Retail investors are looking for medium-to-long-term themes such as the fourth industrial revolution, and asset managers should be able to capitalise on these opportunities.”
