overview of korean etf market - stock exchange of thailand · 2015. 3. 19. · overview of korean...

Overview of Korean ETF Market

2010. 8

Agenda

� About ETFs

� Overview

� Key success factors of ETFs

� New Trends of Korean ETF Industry

� Challenges to Korean ETF Industry

About ETF

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)

• 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

Liquidity Providing

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

Overview

Growth of Korean ETF Market

2002 2003 2004 2005 2006 2007 2008 2009

60Net Asset Value(KRW)

Number of ETFs

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

Position in Asia-Pacific ETF market

(Source : DB)

ETF Issuers Ranked by AUM

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

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

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%

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%

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 )

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

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%

Key success factors

of Korean ETF Market

1. Regulation

2. Liquidity

3. Cooperation with AP & LP

4. Marketing & Education

5. Others

1. Regulation

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)

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

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 )

In case of short selling ETF

- Sell overvalued ETF, Buy Basket of stocks (PDF)

Settlement

[T day]

[Settlement day]

+ Cash from ETF selling

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

+ Stock basket

In-Kind Redemption

- 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

2. Liquidity

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

Liquidity- ETF with no Futures sharing benchmark

Liquidity providing by LP is a kind of arbitrage trade based on absolute

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

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

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

[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 )

3. Cooperation with AP&LP

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

Fee (bp)

Custodian

Management

Entity

Fee Structure of ETFs

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

4. Marketing & Education

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

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

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

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

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 )

5. Others

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

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

ISSUED ETF Unit

Issued ETF unit of KODEX CHINA H ETF

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

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

21-Sep-08

21-Nov-

21-Sep-09

21-Nov-

ISSUED ETF Unit

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

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

14-Jun

28-Jun

KODEX 200

KODEX Leverage

KODEX Inverse

(# of traded Unit of ETFs)

New Trend of Korean ETF industry

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

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

Challenge to Korean ETF industry

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

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

Appendix I

KODEX Samsung group (Bloomberg: 102780 KS)Fund

Performance

History, net of fees

Sharpe ratio

Investment

features

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

Sharpe ratio

Investment

features

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%

08-05-20 08-09-20 09-01-20 09-05-20 09-09-20 10-01-20

KODEX Samsung group BM

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

KODEX Inverse (Bloomberg: 114800 KS)Fund

Performance

Sharpe ratio

Investment

features

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

Sharpe ratio

Investment

features

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%

09-09-14 09-10-14 09-11-14 09-12-14 10-01-14 10-02-14

KODEX Inverse Underlying Index

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

※ As of Mar. 10, 2010

KODEX Leverage (Bloomberg: 122630 KS)Fund

Performance

Sharpe ratio

Investment

features

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%

10-02-17 10-02-22 10-02-27 10-03-04 10-03-09

KODEX Leverage Underlying Index

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