[Practical Finance] Can't Find the 2nd Ecopro?… Focus on ETF·ETN

ETF, Traded Like Stocks... Diversified Investment Effects Across Various Products
ETN Includes at Least 5 Items... Assets Not Possible with ETFs Also Available

Office worker Mr. A has many concerns about stock investment. Even though the stock market is gradually recovering these days, Mr. A's account shows a sea of red. He wants to pick high-flying stocks like Ecopro, but even experts find that difficult. He also considered investing in funds, but the complicated redemption process in case of urgent cash needs worries him.

For investors like Mr. A who share these concerns, there is a perfect investment option: Exchange-Traded Funds (ETF) and Exchange-Traded Notes (ETN). ETFs and ETNs combine the best features of stocks and funds. As of the end of last year, the net asset value of ETFs exceeded 82 trillion won, and the indicative value of ETNs surpassed 11 trillion won, gaining popularity and growing rapidly.

Similar Yet Different: ETFs and ETNs

An ETF is a fund that invests in a specific index or asset and can be bought and sold on the Korea Exchange like regular stocks. For example, 'KODEX 200' is an ETF that holds 200 companies included in the KOSPI 200 index in proportion to their market capitalization. The price fluctuations of this ETF move similarly to the KOSPI 200.

As of the closing price on the 10th, the price per share of KODEX 200 was 33,140 won. By purchasing one share, an investor effectively invests in all the top 200 KOSPI stocks. This means you can invest in well-known companies such as Samsung Electronics, SK Hynix, Samsung SDI, and LG Energy Solution for around 30,000 won.

ETFs must generally include at least 10 different stocks to be structured. As of the end of last year, 666 ETF products were listed on the stock market, all of which include multiple stocks or underlying assets in their ETFs. This allows investors to enjoy the benefits of diversified investment with a small amount of money.

ETF products vary widely, from those tracking representative indices to active funds, sector-specific, and thematic ETFs. If an investor believes that the secondary battery sector will be in the spotlight but is unsure which company's stock will rise, they can invest in ETFs like 'TIGER Secondary Battery Theme' or 'KODEX Secondary Battery Industry.' These ETFs include stocks such as Samsung SDI, LG Energy Solution, and Ecopro BM, which have recently seen price increases. The ETFs have recorded returns of 60-90% since the beginning of this year.

ETFs have the advantage of diversified investment by holding multiple stocks while also offering high liquidity. ETFs can be easily traded through Home Trading Systems (HTS) or Mobile Trading Systems (MTS), just like regular stocks. This contrasts with general funds, which typically charge about 70% of profits as redemption fees if redeemed within three months.

ETNs are similar to ETFs but differ in their management entities. ETFs are managed by asset management companies like funds, whereas ETNs are products created by securities firms through derivative transactions. Specifically, ETFs have asset management companies and trust companies as managers, so even if the asset manager goes bankrupt, the ETF assets remain intact. In contrast, ETNs involve securities firms trading derivatives, so if the securities firm goes bankrupt, there is a risk of losing the principal.

However, ETNs require inclusion of only five or more stocks, allowing for a concentrated portfolio in specific sectors and flexible creation of various indices. Some assets that cannot be made into ETFs are possible with ETNs.

Another major advantage of ETNs is that they have less tracking error compared to ETFs. For example, ETFs tracking the KOSPI 200 must adjust the weight of included stocks according to price fluctuations, which causes tracking errors. ETNs are different. Securities firms reflect the underlying index's daily return in the indicative value regardless of the asset's operating profit, resulting in almost no tracking error. This is why many ETN products are based on commodities, exchange rates, and volatility.

How and What Should You Buy?

Generally, ETFs and ETNs can be easily traded like stocks through HTS or MTS after investors complete a suitability survey and transaction report. However, investing in leveraged products requires prior education from the Korea Financial Investment Association and a minimum deposit of 10 million won.

Once ready to invest in ETFs and ETNs, investors must choose which products to invest in. As of last year, the ETF 'KODEX US S&P Energy (Synthetic)' ranked first with a 62.7% return among all ETFs. This ETF includes about half of US oil companies such as ExxonMobil and Chevron, and its rise is attributed to the increase in crude oil prices due to the Russia-Ukraine war.

The ETFs ranked second to fifth in returns were inverse ETFs tracking twice the KOSPI 200 futures index. The KOSPI index, which hovered around 3,000 at the beginning of last year, collapsed to around 2,200 by year-end, so inverse ETFs that move opposite to the index showed high returns.

For ETNs, 'Daishin Inverse 2X Aluminum Futures ETN(H)' recorded a 99.6% return last year, ranking first. The US ban on Russian aluminum imports caused aluminum prices to surge, benefiting ETN products based on commodity underlying assets and resulting in high returns.

Recently, investors' interest has focused not only on domestic but also global products. Researcher Baek Chan-gyu of NH Investment & Securities explained, “Growth sectors such as IT, communication, and discretionary consumer goods are expected to record high return on equity (ROE). ETFs like High Tech (VGT), Communication (XLC), Global Consumer Discretionary (RXI), and Industrials (XLI) are preferred.”