[Inside Chodong] Time to Move Beyond the ETF Fee Reduction Debate

Passive ETF Fee Competition Is a Natural Trend
Competitiveness Must Be Proven in the Active ETF Market

The net asset size of domestic Exchange-Traded Funds (ETFs) has grown to 180 trillion won, intensifying the competition to lower fees. The reduction in total fees is positive news for investors as it can reduce investment costs.

The competition to lower total fees is a natural trend. The main investors in the domestic ETF market are individual investors and institutional investors. Institutional investors are relatively more sensitive to total fees than individual investors. Institutions selecting ETFs to diversify their portfolios prefer passive ETFs focused on traditional underlying assets, including market benchmark indices.

There is little difference among asset managers of passively managed equity ETFs, which have grown rapidly in quantity. If the quality is similar, investors inevitably prefer cheaper products. However, ETF investors should not overlook that they must bear not only total fees but also other costs such as trading and brokerage fees. There are many ETFs with low total fees but high actual cost burdens.

The fee reduction competition has continued this year following last year and is likely to persist. While the potential side effects of fee reduction competition should be guarded against, there is no need to engage in exhaustive debates over it.

Regulators should rather create a foundation for asset managers to compete in terms of diversity. For latecomers to survive in the domestic ETF market, which is dominated by leading asset managers, it is more important to launch various ETFs that can grow investors' assets than to compete on fees.

Among domestic ETF investors, individuals with a short-term investment tendency have recently shown great interest in sector ETFs that are gaining attention. Investors seeking higher returns than the market benchmark indices invest in specialized ETFs despite relatively higher investment costs.

Among domestic asset management companies, Timefolio Asset Management and Samsung Active Asset Management are focusing on the active ETF market. Timefolio Asset Management was the first in Korea to list an active ETF investing in the artificial intelligence (AI) industry and attracted investors by launching ETFs that invest in various growth industries such as the space industry and consumer trends. The net asset size of the 13 'TIMEFOLIO Active ETFs' surpassed 1 trillion won earlier this year. This achievement is notable as it was accomplished solely with equity ETFs without bond or interest rate ETFs.

Samsung Active Asset Management is increasing its presence by launching ETFs such as the 'KoAct Global Climate Tech Infrastructure Active ETF' and the 'KoAct U.S. Brain Disease Treatment Active ETF.' The Global Climate Tech Infrastructure ETF, listed in January last year, exceeded a 70% return within about a year of listing.

The total fee for the U.S. Brain Disease Treatment ETF, launched by Samsung Active Asset Management in September last year, is 0.5% per annum. This is 80 times more expensive than the KODEX U.S. S&P 500 ETF, whose total fee was recently lowered by Samsung Asset Management from 0.0099% to 0.0062%.

Ultimately, asset managers must prove their competitiveness in the specialized ETF sector, which generally has higher management fees, or they will inevitably be eliminated from the market. Park Hyun-joo, chairman of Mirae Asset Group, recently emphasized the importance of differentiated products, so-called 'killer products,' that can transform the market.

For asset managers to launch various ETFs, investors must also have the ability to select ETFs. As investors' standards rise, asset managers will have no choice but to strive to create ETFs that pursue added value beyond those that anyone can create.