South Korea’s 160 trillion won ($118 billion) exchange-traded fund (ETF) market is shifting toward funds that invest in overseas assets. Over the past five years, ETFs investing in foreign securities, such as the U.S. S&P500, have grown 14.4-fold, compared to a 2.2-fold growth for domestic ETFs.
International ETFs listed on the domestic stock market have served as convenient channels for investing abroad. While structured as funds, ETFs can be traded easily, like stocks. Some critics are concerned that domestic ETFs only benefit foreign markets.
Net assets of ETFs based on overseas investments amounted to 50.8 trillion won as of last month, according to Korea Exchange data provided by Rep. Kim Hyun-jung of the Democratic Party of Korea on Oct. 14. This is a 14.4-fold increase compared to the 3.7 trillion won overseas investment ETFs in 2019.
In contrast, domestic asset-based ETFs had net assets of 106.1 trillion won by the end of last month, up from 48 trillion won in 2019, a 2.2-fold increase.
Asset managers in South Korea have been launching more international ETFs over domestic ones. By the end of last month, 61 new international ETFs had been introduced, compared to only 20 new domestic ETFs. The same trend was seen in the previous year, with 79 new international ETFs added, compared to just 67 domestic ones.
Mirae Asset Management and Korea Investment Management are leading this trend. As of September, Mirae Asset’s total ETF assets were nearly evenly split between domestic and international assets, and Korea Investment Trust Management’s international net assets were double its domestic net assets.
Asset managers explain that this shift reflects growing demand from domestic investors for international assets. However, critics contend that these funds provide an easy conduit for asset managers to raise money in the domestic market and invest it abroad.
Data from Koscom’s ETF Check reveal that no domestic asset ETFs ranked in the top 10 for net inflows this year. Mirae Asset’s Tiger US S&P500 ETF ranked first with 1.868 trillion won in inflows, followed by Tiger US Dividend Dow Jones (983.4 billion won) and Samsung Asset Management’s KODEX US S&P500TR (866.7 billion won).
Excluding U.S.-focused ETFs, the highest ranking was the TIGER India Nifty 50 ETF, ranked 8th with 469.2 billion won in inflows. The highest-ranking domestic investment ETF was the KODEX KOSDAQ 150 Leveraged ETF, ranked 15th with 359.5 billion won in inflows.
The preference for international ETFs is even more pronounced among younger investors.
According to NH Investment & Securities, six of the top 10 most purchased ETFs by investors in their 20s in the third quarter of this year were U.S. index-tracking funds such as the TIGER US S&P500. This marks a significant shift from the same period last year, when all of the top 10 net purchases were in EV battery and POSCO-related companies such as POSCO Holdings, L&F, and LG Chem. Among investors in their 30s, U.S. index-tracking ETFs ranked 3rd to 8th in net purchases in the third quarter. The only generation without a U.S. index ETF in the top 10 net purchases was those in their 60s and older.
“More investors are favoring international ETFs because the Korean stock market has been stagnant amid a global rally,” said an industry insider.
