The exchange-traded funds market in Korea has made solid progress despite sluggish stock performance. Yet some ETF providers are now looking beyond their national borders with the view to cross-listing funds on overseas exchanges, but the experience isn’t all plain-sailing.

“We need to go global to expand the Korean ETF business and will strive to reach that goal,” says Bae Jae-Kyu, head of Samsung Asset Management’s ETF business.

“We try to cross-list our products on foreign stock exchanges," he adds, citing that Samsung AM was the first to list a foreign ETF (in November 2007) on the Tokyo Stock Exchange with its Kodex 200 ETF. And, from July 12, Japanese retail investors will be able to trade the KRX-listed Kodex 200 ETF via direct online trading.

However, “there are no other immediate plans on cross-listing”, says Bae. “We have also tried such listings on regional stock exchanges, including Hong Kong, but due to each country’s regulatory issues, the process has been delayed.”

Rival provider Mirae Asset has listed a number of ETFs in Hong Kong in the past year.

One attraction for foreigners is clear: the Korean ETF market is very liquid and heavily traded. By the end of June, total ETF daily trading volume in Korea had reached 17.1% of total Kospi equity volume. At the end of last year the ratio was 12.44%, up from 1.68% at the end of 2010.

Foreign investors are significant players in the market. In May they accounted for two-thirds ($130 million) of the daily trading volume of Samsung AM’s Kodex Leverage ETF and 55% ($80 million) of its Kodex Inverse ETF’s daily volume.

“These are mainly arbitragers (high-frequency traders), mostly based in Hong Kong and Australia,” says Bae. Their strong interest is at least partly explained by the fact that leverage and inverse ETFs are not permitted in many markets.

The domestic market is certainly growing fast in terms of AUM. According to London-based ETF Global Insight, the total Korean ETF market stood at $9.4 billion as of May 31, up from $3.3 billion at the end of 2009.

But it is increasingly fragmented, with AUM spread among 121 funds, up from four in October 2002, when the domestic ETF industry started. Of that total, 94 have daily trading volumes of less than 10,000 trades and, as such, are not serving the purpose of ETFs for investors.

As elsewhere, a handful of firms manage the lion’s share of assets, suggesting a shakeout is likely with a few firms coming out on top, as has been predicted for other markets.

Samsung AM is the biggest provider, with a 57% market share and 27 funds. Mirae Asset is next in line, with a 12% market share spread among 43 funds. Another 13 local ETF managers make up the remainder.

The most popular types of ETF in Korea are stock-market trackers with a 54% market share, followed by leverage and fixed-income products.