Korea welcomes cooling move after ETF trading triples
Overall trading volume for ETFs has more than tripled in South Korea month-on-month amid the growing popularity of two products in particular.
Average daily trading volume for Korean ETFs stands at $925 million to date in August, compared with less than $270 million in July, according to Samsung AMC. Total market capitalisation is almost $8 billion.
One strategy that has clearly caught the attention of investors is the leveraged ETF, which is designed to create 2-3 times the return of its underlying index – rather than to emulate it like standard ETFs – although it involves higher risk and comes with borrowing issues.
The other popular product is inverse ETFs, which are constructed using derivatives designed to profit from a decline in the value of an underlying benchmark.
Samsung AMC launched a leveraged ETF in February last year, and daily trading in it rocketed to $453 million on August 22 (two similar leveraged ETFs launched by Mirae Asset Global Investors and KB AMC in April last year reached less than 5% of Samsung’s total).
Such has been the speed and intensity of the jump in trading volumes this month that, amid stock market volatility, the government moved to ban credit lending temporarily. At the same time it increased the amount investors have to invest (margin ratio) from 40% to 100% to cool speculation.
It was a move that was welcomed, even by Samsung AMC itself – despite the fact that its leveraged ETF is among its most successful products.
“I think the government’s decision to ban credit lending and to increase the margin rate on leveraged ETFs to 100% is timely and appropriate,” says Bae Jae-Kyu, CIO and managing director of Samsung AMC’s ETF management division.
He noted that for the overall well-being of the domestic stock market, a longer-term perspective was required, pointing out that such an extreme focus on one particular product was unhealthy.
Another professional who preferred to remain anonymous says market consensus is that the government’s temporary ban is acceptable, at least for now, with the 40% margin ratio for leveraged ETFs seen as contributing to unwelcome speculation among retail investors.
Korea’s ETF industry started with just four funds in 2002, but has more than 100 now, over half of which have been launched since the end of the first quarter last year.
The top three Korean asset managers – Samsung AMC, Woori AMC and Mirae Asset Global Investors – have launched a variety of sector and thematic ETFs, as opposed to simple passive index followers.
Samsung AMC manages over 56% of overall ETF market share, whereas two others share about 12%, respectively.
Despite the ETF industry’s recent surge, local professionals see that it still has plenty of room to grow, given that its trading volume as a proportion of overall market volume is far lower than for other developed equity markets at 8.3% (up from 3.4% in July), versus 20% for the US.