Post on 14-Sep-2020
1
Overview of Korean ETF Market
2010. 8
2
Agenda
� About ETFs
� Overview
� Key success factors of ETFs
� New Trends of Korean ETF Industry
� Challenges to Korean ETF Industry
3
About ETF
4
What is ETFs
•ETFs are open-end index fund listed on exchange to trade like
individual stock
- Index fund : Tracking index, Low expense, Low turn over
- ETFs : Real-time trading on stock exchange
•Innovative new financial product in the last two decade
•The first ETF is launched in US in 1993
(Source : KRX, Samsung AMC)
5
• Value of PDF= Value of Creation unit
• PDF is a stock basket of 1 Creation Unit of ETFs
• AP(PD) : Authorized Participant
- Brokerage Firms which have rights to create and
redeem ETFs
Flow of ETFs
Investor Stock Exchange
Authorized
Participants ETF Manager
Cash
ETF
Liquidity Providing
ETF
6
Advantages of ETFs
• High Accessibility : Easy to trade through Exchange like stocks
• Low Cost : relatively low cost than mutual fund
•Transparency : Fund portfolio opened to public
• Liquidity : easy liquidation
•Modularity
: Excellent investment vehicle for asset allocation and other strategy
(Source : KRX, Samsung AMC)
7
Overview
8
Growth of Korean ETF Market
0
5000
10000
15000
20000
25000
30000
35000
40000
2002 2003 2004 2005 2006 2007 2008 2009
0
10
20
30
40
50
60Net Asset Value(KRW)
Number of ETFs
58
3,941
2010
Q2
37
2,695
2008
50
3,237
2009
12
1,678
2006
6
795
2005
6
586
2003
2144# of ETFs
2,579459283NAV
200720042002(Mil/USD)
• First Korean ETFs listed on 2002
• NAV increased 10 times since 2002
• # of Product : 4 to 58 (as end ofQ2 2010)
• # of ETF Management Company
: 3 to 9
Rapid Growth of ETF Industry
(Source : KRX, Samsung AMC)
9
Position in Asia-Pacific ETF market
(Source : DB)
ETF Issuers Ranked by AUM
10
Highly active ETF market in ASIA
Korean ETF is very actively traded than other ETFs in Asia-Pacific Market (Source : DB)
ETF Issuers Ranked by daily average Volume
11
Variety of Korea ETF Market
• Diversified Product Line-up
• Domestic equity ETF dominates ETF market and Bond ETF is growing fast recently
Variety of Product
Number of Product by type Share(%) By exposure
(Source : KRX, Samsung AMC)
Type # of ETFs
Broad Market 12
Leverage&Inverse 6
Thematic 10
International 6
Sector 14
Style 3
Commodities 1
Fixed Income 6
Total 58 Domestic Equity,73.50%
Bond, 22.14%
International,4.15%
Commodities,0.21%
12
Who trades ETFs in Korea?
Daily Average Traded value (MIL. KRW) of ETF in Korea by investor
• Institutional Investor (Fund, Broker) is the largest user of ETFs
• As end of 2009, Institutional Investor 57.7%, Individual 19.2%, Foreigner 23.1%
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2005 2006 2007 2008 2009
Institutional Investor
Individual Investor
Foreign Investor
(Source : KRX )
(MIL. KRW )
13
Why they trade ETFs?
Institutional Investor
• Fund : Enhancing Index fund, Arbitrage trade, Core-Satellite Strategy
• Broker & Dealer : Arbitrage trade, Wrap account
• Bank : Trust product, Proprietary Investment
• Insurance Company : Variable Insurance, Proprietary Investment
Foreign Investor
• Arbitrage trade
• Long-term Investment
• To avoid regulation (prohibit to buy stocks of telecommunication Sector) .
Individual Investor
• Long-term Investment, Short-term Trade, ETF Accumulation Investment
14
Samsung Kodex ETFs
• Samsung’s market share of Korea ETF market is more than 50%
• Kodex 200 is, by itself, more than 1.3 Bil USD
Dominant & Best ETF Originator and Manager
Accomplishment Highlights
• Oct. 2002: KODEX 200, the first ETF, was listed in KSE
• Sep. 2007: KODEX China H, the first overseas ETF, listed
• Nov. 2007: KODEX 200 listed in Tokyo Stock Exchange
• Advisor of TDEX ETF (Thailand ETFs) since Sept. 2007
• SEP 2009 : First Bond ETF in KOREA, First -1X inverse ETFs in ASIA
• FEB 2010 : First 2X Leverage ETFs in ASIA
Samsung, 46.8%
Samsung, 46.8%
15
Key success factors
of Korean ETF Market
16
1. Regulation
2. Liquidity
3. Cooperation with AP & LP
4. Marketing & Education
5. Others
17
1. Regulation
18
Regulation
• Samsung cooperates with KRX closely to enact regulation to make ETF market
efficiently
- Easy program trading
- Exemption of short selling restriction
- Exemption of downtick rule
• Samsung proposes the change of regulation for New type ETF
(Financial investment service act; effective from Feb., 2009)
- expands underlying asset: Fixed income/ commodity ETF
- way of managing portfolio is diversified (leveraged ETF and Inverse ETF)
note, swap (multi-swap counter party)
19
Regulation-short selling
•6. Cases where the settlement of the ETFs is possible by the settlement
date with the sale of the ETFs to be delivered as a result of a request for
issuance of new shares or additional creation units;
•7. Cases of selling shares to be delivered as a result of a request for
repurchase of ETFs, where settlement is possible by the settlement date;
KRX Stock Market Business Regulation;
-§17 Restriction on short selling
☛ Exception on short selling restriction
20
Regulation-Trade Cycle
short selling of ETF and equity short selling for ETF is key system of liquidity providing
- AP or MP can sell and buy ETF unlimitedly without any capital and stock of ETF
T+2 Cycle in Primary Market T+2 Cycle In Secondary Market
ETF trade is not restricted by cash liquidity and stock of ETF on T-day
(Source : Black rock )
21
In case of short selling ETF
- Sell overvalued ETF, Buy Basket of stocks (PDF)
Settlement
[T day]
[Settlement day]
+ Cash from ETF selling
+ ETF
In-Kind Creation
Stock basket of ETF
Buy stock basket (PDF) of ETF from market
Request creation of ETFShort selling : ETF
- Cash for Basket Purchase
- ETF
Regulation-Trade Cycle
22
+ Stock basket
In-Kind Redemption
ETFs
- Cash for ETF Purchase
In Case of short selling of stock basket
- Sell overvalued stock basket (PDF), Buy ETFs
Settlement
[T day]
[Settlement day]
+ Cash from Stock
basket selling
Buy ETF from market
Request redemption of ETFShort selling: Stock Basket (PDF)
- Stock basket
Regulation-Trade Cycle
23
2. Liquidity
24
Liquidity- Two forms of ETF liquidity
ETF liquidity is not everything that you see
Real ETF Liquidity
Liquidity of ETFs Liquidity of underlying asset & Futures
• Liquidity supplied by secondary market
of ETF
• Liquidity supplied from creation/redemption
• Market maker can maintain competitive bid-
offer spread by using Futures
• Traded volume of ETFs is not the mirror of liquidity
• ETF liquidity can be supplied from creation and redemption process
• Liquidity of underlying Asset is the determinant of ETF liquidity.
Individual investors Market makers
25
Liquidity- ETF with no Futures sharing benchmark
Liquidity providing by LP is a kind of arbitrage trade based on absolute
value
Bid by LP
Ask by LP
Spread � ETF NAV = (PDF х Price)/Unit of CU
• For hedging
- Maintaining inventories
- Borrowing baskets or ETFs
- Split the basket
- Market Impact & Tracking Error
Must Bid > NAV > Ask
26
Liquidity- ETF & Futures sharing the same benchmark
Liquidity providing is arbitrage trade based on futures basis
• ETF price of LP is decided by Futures basis
• Futures market with deep liquidity is required (ex. Kosip200 index futures market)
Step 1 : Buy Basket & sell Futures (Cash & Carry)
Determine basis of entry
Step 2 : Request Creation of ETFs
Step 3 : Sell ETF in lower level of Basis of entry (Position Unwinding)
Case #1 Market situation is favor to cash & Carry arbitrage(Futures is traded at premium)
Step 1 : Borrow Basket or ETFs
Step 2 : Request creation of ETFs
Step 3 : Sell ETFs, Buy futures (reverse cash & Carry)
Determine basis of Entry (LP should forecast for fair level of basis)
Step 4 : Buy Equity Basket, Sell Futures (Position Unwinding) at better level than entry
Case #2 Market situation is favor to reverse cash & Carry arbitrage
27
Liquidity- ETF Arbitrage in Korea
Tax Advantage : Exemption of Transaction tax 0.3% to sell ETFs
• The difference of Tax has encouraged Arbitrage trade based on ETF
• ETF liquidity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
09:0
0:0
0
09:0
6:0
0
09:1
2:0
0
09:1
8:0
0
09:2
4:0
0
09:3
0:0
0
09:3
6:0
0
09:4
2:0
0
09:4
8:0
0
09:5
4:0
0
10:0
0:0
0
10:0
6:0
0
10:1
2:0
0
10:1
8:0
0
10:2
4:0
0
10:3
0:0
0
10:3
6:0
0
10:4
2:0
0
10:4
8:0
0
10:5
4:0
0
11:0
0:0
0
11:0
6:0
0
11:1
2:0
0
11:1
8:0
0
11:2
4:0
0
11:3
0:0
0
11:3
6:0
0
[Basis]
EX) KOSPI200 Intraday Basis (Contango)
Market Basis=Futures-Equity(KOSPI200)
Theoretical Difference
(Implied interest)
Transaction Cost
Transaction TAX
Theoretical Difference
(Implied interest)
Transaction Cost
Less Opportunity
for Arbitrage
More Opportunity
for Arbitrage
With TAX (Stock) Without TAX(ETF)
Arbitrage Cost
Arbitrage Possible Line
With tax
Without tax
(Source : Samsung AMC )
28
3. Cooperation with AP&LP
29
Cooperation with AP/LP : Fee Structure
- APs and LPs earn fee paid by fund
- AP/LP Fee is good incentive for AP(LP)’s Marketing activitIES for ETF
2~3other
5~20AP/LP
3~5
20~60
Fee (bp)
Custodian
Management
Entity
Fee Structure of ETFs
30
Cooperation with AP/LP : Other Compensation
Co-work with ETF Manager and AP/LP is crucial to the success of ETF business
- Cooperative AP&LP should be compensated.
- Keep strong and strategic partnership
Compensation for AP/LP
ETF Manager AP/LP
Strategic Alliance
Ex) KODEX Consortium
AP/LP Performance Evaluation
Compensation from manager
31
4. Marketing & Education
32
Create demand
• Massive Education Campaign & PR: common activity
- Keep educating retail and institutional investors for
the use of ETF by media
• Creates distribution channel: Korea specific activities
- low fee
- multi asset class investing
33
Distribution channel of Kodex ETF
Various channel to invest in Kodex ETF
• Kodex ETF is traded on stock exchange just like stocks
• Kodex ETF can be sold by private bankers in brokerage firm and bank
BankExchange Brokerage firm Insurance company
- Bank Trust Product -Wrap Account (SMA)
- Automated Investment Plan- Variable Insurance
- Trading
New distribution channel for ETF
Liquidity Long term investment┼ Success of ETFs Product
34
New channel - Bank
Bank : the largest financial sector in Korea
• Korean Banks has the most powerful distribution channel
• But Bank can not run brokerage business
• They can handle ETFs only in trust product
• Samsung and LP set up new trading system for ETF investment in trust product
Bank trust product
Which invest in ETFs
Bank LP Stock Exchange
Implement orders
as given by bank
35
New product:Fund of ETF-Brokerage Firm
Brokerage firm : Seeking New profit source and new Business
• WRAP account based on various investment strategy is new business of Korean
brokerage firm.
• ETF is perfect product for wrap account and Asset allocation
ETF WRAP account
Customized, flexible, Transparent Investment
Equity ETF
Fixed Income ETF
Asset Allocation
Style ETF
Sector ETF
Rotation Strategy
Country ETF
Region ETF
Oversea Investment
36
Demand of global ETF Market
Since 2000, Investment Advisor leads boom up of global ETF market
• Institutional investors have embracing ETFS for multi asset class investing
• Marketing target for ETFs is changing from institutional to retail investors
- Massive education campaign to build investment advisor market is successful
Institutional investorInstitutional investor
Retail Investor
Early Period Growth Period
Education Campaign
(Source : BLACKROCK )
37
5. Others
38
Timing for product launch
• KODEX China H tracks HSCEI INDEX
• Inception date : OCT 10th 2007
• Year 2007 is in the middle of “ CHINA BOOM”
• Size of ETF grew by 6 times only in 1 month after
inception; the fastest growth among Korean ETFs
• The most hot product in 2007
Timing was the success factor of ETF
Samsung KODEX China H is the largest oversea ETF in Korea
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
2007
-10-
10
2007
-10-
17
2007
-10-
24
2007
-10-
31
2007
-11-
07
2007
-11-
14
2007
-11-
21
2007
-11-
28
2007
-12-
05
2007
-12-
12
2007
-12-
19
2007
-12-
26
2008
-01-
02
2008
-01-
09
ISSUED ETF Unit
Issued ETF unit of KODEX CHINA H ETF
(Source : Samsung AMC )
39
Creativeness
• Unique product of Korea
• ETF which tracks Samsung group Index
• Second largest ETFs among Samsung Kodex ETFs
• The name “Samsung “ is the most reliable and
trustworthy to local Investors
• Better return than that of KOSPI200
Creativeness is the success factor of ETF
Samsung KODEX Samsung group ETF is the most successful product except KOSPI200
tracking ETF
ETF unit of Kodex Samsung Group
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
21-M
ay-
08
21-Ju
l-08
21-Sep-08
21-Nov-
08
21-Ja
n-09
21-M
ar-
09
21-M
ay-
09
21-Ju
l-09
21-Sep-09
21-Nov-
09
21-Ja
n-10
21-M
ar-
10
ISSUED ETF Unit
(Source : Samsung AMC )
40
Meet investor’s needs
• Traded volume of KODEX Leverage ETF exceeds that
ofKodex200 which is the largest ETF in Korea
• KODEX Leverage becomes the most actively traded ETF
in only 7 months after inception
• KODEX inverse ETF is also heavily traded.
• Leverage ETF can compensate the weakness of low
volatility of unleveraged ETF
• Inverse ETF provides an opportunity of hedging or making
profit of falling market
KODEX leverage ETF and KODEX Inverse ETF is the successful trading tool for individual
investor
ETF unit of Kodex Samsung Group
(Source : Samsung AMC )
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
22-Feb
8-M
ar
22-M
ar
5-A
pr
19-A
pr
3-M
ay
17-M
ay
31-M
ay
14-Jun
28-Jun
12-Ju
l
26-Ju
l
9-A
ug
KODEX 200
KODEX Leverage
KODEX Inverse
(# of traded Unit of ETFs)
41
New Trend of Korean ETF industry
42
Fixed Income ETF
• 7 Fixed income ETF listed, more than 20% market share of ETF market
• Various use by Institutional investor( Specially, Hybrid Fund)
• Treasury 3y ETF, Short term Bond ETF is popular to Institutional investor
Significantly growing product
Growth of FIXED INCOME ETFs
600,000
650,000
700,000
750,000
800,000
850,000
900,000
950,000
1,000,000
1,050,000
1,100,000
Sept
embe
r-09
Oct
ober
-09
Nove
mbe
r-09
Dec
embe
r-09
Janu
ary-
10Fe
brua
ry-1
0M
arch
-10
April
-10
May
-10
June
-10
July-
10
(Source : Samsung AMC )
43
Futures Based ETF
• Cash creation and redemption makes possible to use futures for ETF management
• KODEX Inverse and KODEX Leverage invest to KOSPI200 futures
• Advantage of Futures for ETFs
- Easy to manage
- No credit risk
- Efficiency for LP
- Various futures and 24 hour trading Market (GLOBEX)
Commodities futures is good vehicle for Commodities ETF development
• Disadvantage
- Tracking error by rolling effect
New Type ETF of Korea is mainly based on futures
44
Challenge to Korean ETF industry
45
Termination of TAX Advantage
• Tax advantage is the biggest advantage of Korean ETFs
• Imposition of tax will lead to decrease of ETF liquidity
• Opportunity of Arbitrage trade will shrink
Transaction tax exemption is terminated at end of 2011
• Oversea ETF has had relative advantage than oversea equity fund
• Oversea ETF is not taxed but oversea equity fund is taxed for income tax
• Trading volume of Samsung KODEX China H is decreasing because of tax fear
Income tax is levied to oversea ETF from first day of July, 2010
46
Other Challenges
• 11 ETFs has de-listed because of lack of trading volume and insufficient fund size
• 5 ETFs track same index(KOSPI200)
• 58 ETFs managed by 9 asset management company (as of June 2010)
Red-Ocean and abnormal product listing
• Total size of equity-type fund : about 100 Bil. (USD), Total ETFs size : 4.5 bil (USD)
• 4.5 % of Market share
ETFs is not main stream of Korean Asset management industry yet
47
Appendix I
48
KODEX Samsung group (Bloomberg: 102780 KS)Fund
Performance
History, net of fees
Sharpe ratio
Investment
features
AUM
Inception date
since inception
• BM: Samsung Group Index
• Pioneer of theme index fund in Korea
• Dividends and interests to be distributed
KRW 296.2 billion
2008.5.20
KODEX Samsung group ETF
• The first theme ETF in Korea
• The most efficient way to invest in the Korean largest business group
0.37na65.39-2.64Fund
-0.68na65.36-3.33BM
Since inception
3y1y6m%
※ As of Feb. 28, 2010
※ Performance in the below table assumes that dividends collected in the funds are reinvested.
KODEX200 (Bloomberg: 069500 KS)Fund
Performance
History, net of fees
Sharpe ratio
Investment
features
AUM
Inception date
since inception
• BM: KOSPI 200
• No. 1 ETF in terms of NAV and trading volume in Korea
• Dividends and interests to be distributed
KRW 1,456.3 billion
2002.10.11
KODEX200 ETF
• The largest ETF with more than USD 1 billion of net asset value
• Deep liquidity: More than a million shares trading volume a day
236.4916.1554.210.44Fund
182.109.5952.11-1.07BM
Since inception
3y1y6m%
40
60
80
100
120
08-05-20 08-09-20 09-01-20 09-05-20 09-09-20 10-01-20
KODEX Samsung group BM
40
100
160
220
280
340
400
02-10-11 03-10-11 04-10-11 05-10-11 06-10-11 07-10-11 08-10-11 09-10-11
KODEX 200 BM
Product description
49
KODEX Inverse (Bloomberg: 114800 KS)Fund
Performance
History, net of fees
Sharpe ratio
Investment
features
AUM
Inception date
since inception
• Underlying Index: F -KOSPI 200
• Targeting -100% of the daily Underlying Index change
KRW 58.6 billion
2009.9.14
KODEX Inverse ETF
• The first Inverse ETF in Asia
• The 2nd deepest daily trading volume among the ETFs in Korea
-3.63nananaFund
2.47nananaU. I.
Since inception
3y1y6m%
※ As of Feb. 28, 2010
KODEX China H (Bloomberg: 099140 KS)Fund
Performance
History, net of fees
Sharpe ratio
Investment
features
AUM
Inception date
since inception
• BM: HSCEI
• Index Replication
KRW 140.5 billion
2007.10.9
KODEX China H ETF
• The first overseas ETF in Korea
• The lowest total investment expense among China funds in Korea
-16.73na26.90-8.17Fund
-18.30na26.00-7.90BM
Since inception
3y1y6m%
90
95
100
105
110
09-09-14 09-10-14 09-11-14 09-12-14 10-01-14 10-02-14
KODEX Inverse Underlying Index
40
60
80
100
120
07-10-09 08-04-09 08-10-09 09-04-09 09-10-09
KODEX China H BM
※ As of Mar. 10, 2010
Product description
50
※ As of Mar. 10, 2010
KODEX Leverage (Bloomberg: 122630 KS)Fund
Performance
History, net of fees
Sharpe ratio
Investment
features
AUM
Inception date
since inception
• Underlying Index: KOSPI 200
• Targeting 200% of the daily Underlying Index change
KRW 44.4 billion
2010.2.22
KODEX Leverage ETF
• The first Leveraged ETF in Asia
• The only 200% Leveraged fund in Korea
5.74nananaFund
2.05nananaU. I.
Since inception
3y1y6m%
90
95
100
105
110
10-02-17 10-02-22 10-02-27 10-03-04 10-03-09
KODEX Leverage Underlying Index