Korean investors look to ETFs for international investment themes

15 April 2014   Category: News, Asia, Korea   By Hank Morris

One manager at KDB Daewoo Securities, Jesse Tyler Buzzie, indicates that he thinks that the gradual increase seen in Korean institutional participation in the ETF market, which now accounts for 24% of ETF turnover there, "could well be the attraction of access to various investment sectors of global markets at very low transactions costs." While not a solution for every investment objective of the Korean institutional investors, it is increasingly clear that for some, the attraction of ETFs that are managed by leading Korean asset managers using first-tier benchmark companies, such as the MSCI and FTSE, are investment options that are too attractive to pass by.

According to Jae Kyu Bae, head of ETFs at Samsung Asset Management, which has the largest market share in the Korean market, there is growing interest on the part of the country’s institutional and retail investors in ETFs with overseas investment themes. But in the case of high net worth investors (HNWIs): "There is a tendency to invest directly into ETFs listed on overseas exchanges due to certain tax advantages." In the case of smaller scale retail investors in Korea, he says: "For those with dividend income of less than 20 million won (US$19,200) from all investment sources, there is little interest in overseas-listed ETFs," and also, "Korean institutional investors that do not pay capital gains or dividends taxes can easily invest into ETFs listed on the Korea Stock Exchange."  In response to the desire of Korean investors, both smaller retail and local institutional investors, to have greater options in regard to global investment, Mr. Bae expects that his company will be issuing more ETFs on the Korea Stock Exchange that have international investment themes.

In terms of investment returns during January 2014, the top gainer amongst Korean ETFs was the KODEX Bio ETF, which is based on overseas pharmaceutical shares, and it recorded a gain of 18.24% in the month, while the second highest returning ETF was the KODEX Transportation ETF, which had a return of 7.38% – the third ranked ETF was the Tiger Healthcare, which recorded a return of 7.16%.  Interestingly, these three were not the top three ETFs in terms of turnover, as the top three in turnover terms were the KODEX Leverage (KOSPI 200), with 306.8 billion won, the KODEX 200 (KOSPI 200) which had 234.5 billion won, and the KODEX Inverse with 149.5 billion won.

Regarding market share by ETFs asset management companies, Samsung Asset Management retained its dominating lead with a 53% share of the market, followed by Mirae Asset with 19.8%, Korea Investment Management with 6.6%, Woori Asset Management with 5.4%, Kyobo AXA with 5.1% and Hanwha Asset Management with 4.5%.  According to the Korea Stock Exchange, the top rated liquidity providers (LPs) for Korean-listed ETFs were Samsung Securities, Tong Yang Securities, Mirae Asset Securities, and Meritz Securities. LPs are rated on the basis of their efficiency in maintaining markets and providing brokerage services in Korean market ETFs for retail and institutional investors.

Looking ahead to the pipeline for new ETF issuances in Korea, it is clear that exposure to international securities markets will increase steadily. Currently, there are 28 international benchmarks being used by Korean ETFs asset managers, and these include some of the biggest names in the business such as FTSE, MSCI, NASDAQ, Dow Jones, Hang Seng, Topix and BNY Mellon, along with a range of others.  Through providing ETFs based on these benchmark indices, Korean asset managers are able to offer retail and institutional investors access to global investments not only in foreign equities and fixed income but also in commodities and currencies. The latter is particularly meaningful to Korean retail investors since they are unable to freely trade in foreign exchange since the authorities in Korea have yet to open the won to full international trading. Thus access to international currencies via a local ETF gives Korean investors a means of accessing global markets in ways that would not currently be available otherwise. 

Considering the percentages of various types of Korean ETFs that are currently listed, it is clear that there is a lot of room for the future growth of ETFs based upon international securities and investments. Currently, 52.6% of ETFs are Korean market-based, while 16.2% are based on bonds, 15.1% are leveraged, and 7.9% are thematic, but currencies and property ETFs each account for only 0.1% of the market. Most Korean retail investors have little or no experience in direct investment into any overseas equities, bonds, currencies, commodities or property. Therefore the Korean ETF market should be an ideal venue for local investors to gain experience in these global investment sectors while paying relatively low fees.