A single-stock leverage exchange-traded fund (ETF), which listed on May 27 this year and dominated domestic stock market discussions, has been diagnosed as occupying only a niche market representing just 0.21% of total ETF assets under management in the U.S. This is because it is not a product that retail investors can easily invest in directly; instead, they access it through private bankers (PBs) at financial institutions, and it has received limited investor choice, keeping it confined to a niche segment. It was also suggested that for the ETF market to develop soundly, fund managers must exercise caution in product design, while investors should approach ETFs as medium-to-long-term asset management tools rather than substitutes for stocks.
On the 15th (local time), Han Dong-hoon, Senior Executive of Amplify ETFs responsible for Asia, who was met in Manhattan, New York, U.S., stated regarding the domestic ETF market, which surpassed 500 trillion won in assets under management (AUM) in the first half of this year: "Fund managers must be even more cautious when designing and manufacturing products, and investors should approach ETFs not as substitutes for stocks but as medium-to-long-term asset management tools if the ETF market is to develop healthily."
Amplify ETFs is a global asset management firm that Samsung Asset Management acquired a 20% stake in during 2022. As of September this year, there are nine Amplify ETFs launched domestically under Samsung Asset Management’s KODEX brand, with total assets under management reaching 2 trillion won. Collaboration also flows in the opposite direction: when Samsung Asset Management proposes an ETF idea, it is listed in the U.S. market under the Amplify name, while actual portfolio management is handled by Samsung Asset Management’s New York branch.
Regarding the steep growth of Korea’s ETF market over the past year, Han noted that "during the COVID-19 pandemic, the proportion of retail investors in Korea surged rapidly, and stock investment culture became widespread, especially among younger generations." He added, "The desire to accumulate wealth through financial investments aligned with an easily accessible ETF market structure, causing the market to expand explosively. The demand from retail investors that could not be met by ordinary stocks was expressed through the ETF frenzy."
Han remarked, "If private funds and mutual funds are exclusive to a small number of investors, then ETFs are the greatest invention of the 21st century, lowering the barrier to financial investment and providing opportunities for asset expansion." He further analyzed that "Korea is particularly notable for its rapid supply of new products, with new ETFs launching every month." Amplify has even introduced Asia Memory Top10 and Robotics Top10 ETFs, inspired by the 'Top10' product structure that gained popularity in Korea.
The ability to invest in ETFs in real time through retirement pension accounts also drove the growth of Korea’s ETF market. In the U.S., real-time ETF trading is limited within the '401(k)' retirement account designed for old-age security, whereas in Korea, investors can trade ETFs in real time not only through IRP (Individual Retirement Pension) and DC (Defined Contribution) pension accounts but also via ISA (Individual Comprehensive Asset Management Accounts). Han evaluated that "most U.S. 401(k) plans consist largely of TDFs (Target Date Funds), and the frequency of rebalancing is restricted. In contrast, Korea allows real-time trading, making ETF transactions quite active even within retirement pension accounts."
Regarding single-stock leverage ETFs that dominated the market this year, Han pointed out, "They do exist in the U.S., but their share is quite small." He explained that the total size of the U.S. ETF market is approximately 16.223 trillion dollars (about 22.441 quadrillion won), among which leverage ETFs account for 180 billion dollars (249 trillion won), and single-stock leverage ETFs amount to only 34 billion dollars (47 trillion won), representing just 0.21% of the total. Han elaborated, "If they were popular, single-stock assets under management would have grown larger. However, as a result of market selection, single-stock leverage products remain at the level of a 'niche market,' handled by only about ten out of over 500 fund managers."
Although financial authorities pushed for their launch citing that they are institutionalized products overseas, these products cannot be subscribed to through the widely used PB channels of financial institutions in the U.S. Han stated, "Individuals can directly search for and choose single-stock leverage ETFs, but demand is low. These products are not listed on bank or securities firm PB channels, creating a structure where investors cannot subscribe." In the U.S., it is common for retail investors to receive product recommendations and proposals from PBs rather than making all decisions independently. The process of selling ETFs through PB channels involves rigorous product screening by each financial institution and complex procedures.
Han also identified the 'supermarket-style' product supply centered on large firms and fierce competition among fund managers as key characteristics of Korea’s ETF market. He explained, "In Korea, major ETF brands must offer products across all lines, resulting in a large number of products themselves. In the U.S., fund managers need at least 100 billion won in margin to earn money through ETFs, whereas in Korea, costs related to product design and manufacturing, ETF listing, management, and delisting are relatively low." It is also assessed that aggressive marketing has become customary even before ETF listing in Korea, and the actual level of regulation is lower than in the U.S.
Considering the scale of the domestic market, Han believes it is time to introduce 'fully active' ETFs. In the U.S., active ETFs can be managed without any obligation to follow a benchmark index. Han argued, "Currently, Korea’s active ETFs are closer to 'passive products' with slightly relaxed obligations to track indices. Since active managers clearly possess advantages, there is a need to move beyond the perception that 'ETF = Index Tracking' and develop truly meaningful active management where fund managers take full responsibility."
Han also forecasted that the ETF market will continue to grow despite rising U.S. base rates. He cited two main reasons for the rise in U.S. bond yields: △decreased demand for U.S. Treasury bonds due to long-term bond issuance by hyperscalers (ultra-large data center operating companies), and △inflation driven by rising international oil prices. Han stated, "Even under such conditions, products like those using 20-year covered calls in the U.S. are emerging, demonstrating that ETFs can develop investment strategies to respond to any market situation." He added, "Recently, while trading volumes of representative index ETFs such as S&P and NASDAQ continue to increase, demand for ultra-short-term bond and covered call products is also rising."
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