With their low fees and ability to give investors access to indices and market sub-categories in one hit, ETFs have expanded rapidly over the past 20 years.

Retail investors in South Korea are increasingly switching to exchange-traded funds from mutual funds, tapping into how ETFs have become more customised, according to a report.

Even though broad fund assets under management fell 5.8 per cent last year to KRW341 trillion ($269.3 billion) from a year earlier, only mutual funds took a hit. In 2022, ETFs’ AuM actually rose 6.1 per cent, Cerulli Associates said in a report.

With their low fees and ability to give investors access to indices and market sub-categories in one hit, ETFs have expanded rapidly over the past 20 years. Since central banks opened the monetary taps in the 2008/09 financial crash, equity and bond markets rose, undermining the attractions of traditional actively managed funds. And ETFs are also available in “smart-Beta” forms where specific sources of return, such as yield, momentum and pricing power, are unpacked and captured indices that ETFs can track.

The report by Boston-based Cerulli said a factor supporting this rise in South Korean ETF’s AuM was that the country has eased ETF regulations. 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, reduce disclosure obligations, and improve the listing review regulation system for ETFs, exchange-traded notes, and equity-linked warrants. 

The exchange has 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. 

Further ETF rule relaxations are expected, the report said. In May this year, the president of the Korea Financial Investment Association (KOFIA) reportedly said 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 $2.4 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.

“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,” Soo Ah Ran Cho, associate director, Cerulli, said. “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.”