[The Editors' Verdict] As Long as 'Zombie ETFs' Remain... A Korean Version of SPY or QQQ Is a Distant Dream

Zombie ETFs Account for 30%
Need for Market Reorganization to Prevent Copycat Practices

"Focusing too much on copying Exchange-Traded Funds (ETFs)..." At the first meeting with domestic asset management industry CEOs since his inauguration on the 5th, Kim Byung-hwan, Chairman of the Financial Services Commission, criticized the industry's behavior of flooding the market with similar products and engaging only in fee-cutting competition, focusing solely on short-term profits. Earlier, on the 8th of last month, Lee Bok-hyun, Governor of the Financial Supervisory Service, also held a meeting with asset management CEOs and warned about excessive competition in the ETF market.

Why have the heads of financial authorities been rushing to reprimand the asset management industry? Let's look back further. "(We) will not do business like selling gum." Lee Jun-yong, Vice Chairman of Mirae Asset Global Investments, attracted industry attention by saying this at a press conference for newly listed ETFs on June 2nd.

The photo is unrelated to the article content. Photo by Jinhyung Kang aymsdream@

Until now, the asset management industry has fiercely competed by launching ETFs in a copycat manner. His remarks publicly condemned the overheated state of the rapidly growing ETF market, which has surpassed 150 trillion KRW in net asset value. He pledged not to recklessly launch undifferentiated ETF products, expressing self-reflection and a call for introspection. The financial authorities’ admonitions share the same context.

The number of domestic ETF products alone reaches nearly 900. This is the result of a flood of listings. New products poured out according to themes. When secondary batteries were doing well, secondary battery ETFs flooded the market; when semiconductors were booming, semiconductor ETFs poured out. It was a recurring phenomenon.

So, how many ETFs are currently at risk of delisting? According to the Korea Exchange’s information data system, among the 881 ETFs listed domestically (as of the first trading day in September), 62 (7.03%) have net asset values under 5 billion KRW. ETFs with daily trading volumes under 1,000 shares number 264 (29.96%). Under the Capital Markets Act, ETFs with trust principal (capital) and net asset values below 5 billion KRW are designated as managed stocks by the Korea Exchange. If this condition persists at the end of the next half-year, the exchange may delist the ETF. In other words, ETFs with delisting risk account for 7% of the total, and so-called 'zombie ETFs' with daily trading volumes under 1,000 shares make up as much as 30%.

The excessive number of ETF listings relative to market size, many of which have net asset values under 5 billion KRW and the prevalence of zombie ETFs, reduce investment attractiveness. Compared to the U.S., where total AUM (Assets Under Management) is estimated around 1,200 trillion KRW, the number of ETFs is more than 20 times greater relative to market size, which frankly says it all. For the domestic ETF market to leap forward, globally recognized ETFs like the U.S.’s 'SPY' or 'QQQ' must emerge. To achieve this, small-scale ETFs and zombie ETFs must be consolidated to create an environment where mega ETFs can appear.

Products flood the market according to trends, but once the trend passes, management becomes lax and returns decline. Our market currently needs reorganization. A consensus has already been formed. The financial authorities have announced plans to prepare a cleanup strategy, and the industry is voluntarily undertaking delisting efforts accordingly. Now, speed must be increased to enable swift reorganization. Once ETFs with diminished product value are delisted, the asset management industry itself must strengthen its structure and strive for healthy qualitative growth. It must take the lead in recovering from overheated conditions. If ETFs continue to be listed in a copycat, mass-produced manner, a 'Korean version of SPY' will never be realized.