[Initial Perspective] What It Takes for a Korean Version of 'SPY' to Emerge

Hwang Junho, Asia Economy Reporter

SPY. It is one of the well-known words in the global capital market. The ticker (symbol) of the exchange-traded fund (ETF) product called ‘SPDR S&P 500 Trust’ is SPY. SPY was created by the American asset management company SSGA and is a typical index fund that can generate profits and losses according to the fluctuations of the S&P 500 index. This means it is more ordinary compared to products like leveraged or inverse ETFs that can yield several times the volatility.

SPY celebrated its 30th birthday on the 29th of last month. In a capital market where astronomical amounts are exchanged every second and products appear and disappear according to investment trends, the ordinary SPY has endured for 30 years. It did more than just endure. It celebrated its 30th anniversary at the throne. The market congratulated SPY’s birthday with phrases such as ‘the product managing the largest assets among ETFs worldwide with a market capitalization of $367.6 billion’ and ‘the representative player of the U.S. ETF market.’

The growth story of SPY runs parallel to the history of ETFs in the U.S. In the early 1990s, when ETFs were in their infancy, they accounted for only 2% of the U.S. asset market but gradually grew in size by leveraging their unique strengths. ETFs are indirect investment products managed by managers like general funds but charge much lower fees (SPY charges 0.095%). Their advantage lies in enabling long-term diversified investment at a low cost while reducing risks associated with direct investment. Unlike general funds, which take several days for redemption, ETFs can be bought and sold like stocks whenever desired, which gradually shifted the investment culture from short-term direct investment to long-term indirect investment.

In particular, the U.S. retirement pension default investment option system, known as ‘401k,’ has been a major pillar of ETF growth. This system manages pension assets according to the initially set investment profile without requiring investors to devise separate strategies. The 401k has recorded annual returns in the 8% range and has produced ‘pension millionaires,’ emerging as a vanguard of retirement assets. As a result, the ETF market, a key product of 401k, expanded significantly. Bloomberg, a U.S. economic news agency, analyzed that the widespread adoption of online trading also contributed to the expansion, with the ETF market now accounting for half of the entire fund market.

The growth of the U.S. ETF market holds significant implications for our capital market. The Korean ETF market began in 2002 when Bae Jae-gyu, currently leading Korea Investment Trust Management, launched ‘KODEX200’ at his previous company, Samsung Asset Management. Although it marked its 20th anniversary last year, ETFs still occupy a negligible share of the fund market. As of the 2nd of this month, KODEX200’s market capitalization is about 5.6 trillion KRW. During the same period, the total ETF market size is 88 trillion KRW, and the total fund size in Korea excluding discretionary investment is estimated at 341 trillion KRW.

Encouragingly, despite liquidity drying up last year, the market recorded continuous growth. Especially with the full-scale launch of the Korean version of the 401k (default option) starting this year, there is a prospect for a turning point in growth. The government introduced the default option aiming to create ‘pension millionaires’ in Korea, similar to advanced pension countries.

However, the authorities are still deliberating whether to allow ETF investments through the default option. The industry unanimously agrees that this is a necessary measure to foster a sound investment culture through long-term indirect investment. If the day comes 10 years from now to celebrate the 30th anniversary of the ‘Korean version of SPY,’ will we be able to discuss changes in the investment culture driven by ETF growth? The answer depends on the government.