The Korea Exchange reported that Korean sector exchange-traded funds delivered the highest returns among local equity funds during the first quarter of 2011. The best performing ETFs included those tracking the energy/chemical, automobile, and steel sectors, and the Hyundai Motor Group.

The total ETF market’s capitalisation increased by about $785 million from the end of the fourth quarter of 2010, representing a quarterly growth rate of 14%, to a total of $6.25 billion. During 2010, the size of Korea’s ETF market grew by about 60% from $3.4 billion to $5.45 billion.

So far in 2011 there have been 10 new ETF launches, bringing the total number of listed products to 86, with more to come.

Recent debuts include ETFs covering copper, corn, agricultural stocks and more exotic products, including one covering the won-dollar exchange rate.

Trading volumes are also on the rise. On a daily trading amount basis, the average turnover during 2010 Q4 was about $110 million. In April, average daily turnover reached as high as $163 million.

The top three ETFs managers are Samsung Asset Management ($3.65 billion of assets under management, with 20 ETFs), Woori Asset Management ($935 million with 11 ETFs), and Mirae Asset MAPS Investment Management ($638 million with 21 ETFs). Currently, there are 13 local AMCs managing ETFs.

In terms of quarterly return performance, there were four ETFs ranked among the top-10 local equity funds: Samsung Kodex energy/chemical ETF (ranked top with a 24.47% return in the first quarter, $41 million market size), Samsung Kodex Automobile ETF (ranked third with a 21.4% return, $50 million), Daishin Giant Hyundai Motor Group ETF (ranked fourth with a 19.97% return, $36 million), and Samsung Kodex Steel ETF (ranked sixth with a 16.71% return, $20 million).

The ETF sector with the largest number of funds is the sector that focuses on large-cap stock indices such as the Kospi 200 with about a 51% market share. Meanwhile, commodity ETFs reported the biggest increase in market size at $66 million (up by 23.3% during the first quarter).

In terms of trading volume, derivatives ETFs increased the most, by $36 million to $87 million on a daily basis, and are up about 72.1% from the last quarter. The most active ones are leverage-structured ETFs; Samsung Asset Management launched the first one in Asia in 2009.

In March, daily trading volumes for both Samsung Kodex Leverage and Samsung Kodex Inverse ETFs jumped to over 10 million shares each.

The largest trading participants in Korea’s ETF market are individual investors with about a 45.5% market share.

Bae Jae-Kyu, CIO and managing director for ETFs at Samsung AMC, says tax issues are still tying up the expansion of overseas ETFs but the spread of sector rotation strategies is helping sector ETFs to grow.

Bae adds that Korea’s ETF market will continue to grow this year. He attributes this to ETFs’ cost effectiveness (0.3-0.6% annual fees), their transparency features, and the breadth of portfolio construction with derivatives.