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(Source: Getty Images Bank) South Korean retail investors bought exchange-traded funds (ETFs) more than stocks on the country’s main Kospi in the last six months as the baskets of securities are safer than individual shares amid growing volatilities in the market.Retail investors obtained a combined net 6.9 trillion won ($5.7 billion) worth of ETFs in the six months to March 18, far more than a net 6 trillion won purchase of stocks, the Korea Exchange data showed. It was the first time for the net purchase of ETFs to surpass demand for individual shares on the Kospi since 2002 when the country introduced the pooled investment securities.The net asset value of ETFs in the country totaled 71.3 trillion won last year, about 200 times of 344.4 billion won in 2002. Currently, 547 ETFs are listed with more than 200 names emerging in the recent five years, compared to only four 20 years ago.WORLD’S NO. 1 GROWTHSouth Korean ETFs’ net asset value grew 42.1% in 2021, exceeding the world’s average increase of 29.5%, according to ETFGI, a research firm ETFGI. The growth was higher than 35.1% in Canada, the birthplace of ETFs, 33.1% in the US, the world’s largest ETF market, and 28.3% in Asia-Pacific excluding Japan.“The net asset value is likely to exceed 100 trillion won next year at the earliest with the current growth as ETFs are in the spotlight in the newly expanding pension fund markets,” said Kim Jung-hyun, office head of ETF investment division at Shinhan Asset Management Co., referring to the size of South Korea’s ETFs.ETFs have been growing more popular for their safety and convenience as they are tradable anytime and provide the effect of diversified investment.Recently, ETFs with various themes appeared in the markets, making everything in daily life an investment target.CRISIS LEADS INVESTORS TO ETFSETFs were introduced in South Korea in 2002 with four names listed such as Samsung Asset Management Co.’s KODEX200 and others tracking the Kospi 200 and the Kospi 50. They were not popular because of their unfamiliar concept, as well as weak interest in passive investments and index funds. The KODEX attracted only 1.1 billion won from retail investors when listed, slightly higher than a minimum requirement of 1 billion won for diversified investment.But investors paid attention to ETFs from 2008 when the global financial crisis hit markets around the world, causing massive losses from public offering funds. ETFs attracted investors with easy subscription and cancellation, as well as low management fees. In 2009-2010, inverse ETFs and leveraged ETFs were launched in Asia, hogging the limelight.“A downgrade to US credit rating in 2011 and the European financial crisis raised volatilities in markers, boosting the popularity of inverse and leveraged ETFs,” said Kim Nam-ki, executive director from Mirae Asset Global Investments’ ETF management business unit. In August 2011, Standard & Poor’s made its first-ever cut in US sovereign debt, lowering the long-term rating one notch to AA-plus with a negative outlook.The net asset value of South Korea’s ETFs exceeded the 10 trillion won mark in 2012 and has been steadily growing to 30 trillion won in 2017 and 50 trillion won in 2019.PARADIGM SHIFTThe market was boosted by the COVID-19 that has been driving investors to ETFs with the net asset value increasing more than 20 trillion won in 2021 when the number of listed ETFs topped 500.“A paradigm shift of the popularization of investment contributed to the rapid growth of the ETF market,” Shinhan’s Kim said.In addition, new types of ETFs such as Smart-Beta ETFs and Total Return ETFs emerged, helping ETFs become an alternative investment. Retail investors also hailed ETFs with various themes such as secondary batteries and metaverse as they wanted more than market average profits. The ETF market grew further thanks to Active ETFs. Nasdaq congratulates Samsung Asset Management on the launch of the world’s first US metaverse ETF on Nasdaq MarketSite at Times Square in New York in December 2021 (Courtesy of Samsung Asset Management) South Korea’s ETF market is expected to rapidly expand, experts said.“ETFs are still the industry’s bread and butter for the future, given their convenience and effects of diversified investment,” said Korea Investment Management CEO Bae Jae-kyu, who is well-known for introducing the country’s first ETF. “The use of ETFs will diversify as the pension market is growing fast.”By Jae-Won Park, Hyeong-Gyo Seo and Eun-Seo Koowonderful@hankyung.comJongwoo Cheon edited this article.
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