"Exaggerating Returns and Hiding Loss Risks" ETF Overhype Warning

Exaggerated Returns and Concealed Losses Found in ETF Advertisements
FSS Takes Corrective Actions Against Misleading Promotions
Consumers Urged to Verify Returns and Fees Before Investing

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Some investment companies were found to have exaggerated returns and concealed potential losses while advertising exchange-traded funds (ETFs), resulting in corrective actions.

On the 9th, the Financial Supervisory Service (FSS) announced that after inspecting 252 ETF advertisements (including 160 covered call ETFs) from 10 asset management firms, many cases were found where returns that could mislead consumers were displayed, potential losses were hidden, and fees were not disclosed, showing insufficient consumer protection.

The inspection revealed that when displaying returns in ETF product advertisements, the returns must be indicated in a way that does not mislead consumers. However, some advertisements emphasized unrealized returns such as returns during periods of high performance or expected/target returns.

Although ETF products carry the risk of principal loss, some advertisements used expressions that could lead consumers to misunderstand ETFs as safe products. Matters related to fees, which affect long-term performance, must also be disclosed, but some advertisements failed to indicate these.

In the case of ETF advertisements that regularly pay dividends, there were instances that could mislead consumers into thinking the products provide stable returns or have almost no risk of loss. Dividends are paid from the underlying assets of ETFs, such as dividends and interest from stocks and bonds, and the net asset value of the ETF decreases by the amount of dividends paid. It should be noted that investment losses may occur if the underlying assets decline.

It was pointed out that not only returns but also fees must be carefully checked. Since the performance of ETFs tracking the same index, such as KOSPI, is similar depending on the underlying assets, long-term performance can vary depending on the fees actually borne. Therefore, fees must be confirmed before investing.

The FSS explained that, together with the Korea Financial Investment Association, it took corrective actions such as modification and deletion for inappropriate advertisements identified during this inspection, and held meetings and guided strengthening of internal controls to prevent recurrence.