Is the Expanded ETN Finding a Way Out with Commodity and Index Types?

Total Market Value of Index Assets 9.16 Trillion KRW
Nearly Doubled Since 2018
Massive Launch of Raw Material-Related Products

[Asia Economy Reporter Minji Lee] Money is pouring into exchange-traded notes (ETNs) managed by securities firms.

According to the Korea Exchange on the 19th, the total indicative value of 264 ETNs listed domestically amounts to 9.16 trillion KRW. This represents the total sum of the index prices that ETNs track, and considering that it was around 4 to 5 trillion KRW in 2018, it has roughly doubled. This year, 134 new ETNs were listed, marking a record high. Last year, 24 new ETNs were listed, 17 in 2019, and 26 in 2018.

The sudden increase in new ETN listings is attributed to the financial regulatory reform plan announced by the Financial Services Commission in May last year. To revitalize the ETN market, ETNs were allowed to use market representative indices such as the KOSPI 200, which had been monopolized by exchange-traded funds (ETFs). As a result, related ETNs reached about 40 this year alone. To attract investment sentiment that had been concentrated on ETFs, securities firms set management fees at zero. ETFs and ETNs have similar product structures, but ETFs are managed by asset management companies, while ETNs are managed by securities firms.

The efforts of securities firms to capture niche demand also played a role. They launched a large number of products related to commodities such as copper, iron ore, natural gas, gold, and silver, which have investment demand but are either undeveloped as products or have limited varieties. This year alone, 54 commodity-related products were listed. On the 9th, six companies simultaneously launched 15 ETNs investing in copper futures. A financial investment industry insider explained, "After the crude oil leverage ETN incident last year, the exchange had restricted issuance, but this year most products were accepted and launched. Since the concept is the same as ETFs in tracking indices, there are many strategies to attract investors with commodity-related products such as metals that are not available in the ETF market."

This year, with international oil prices rising sharply, oil-related ETNs led in terms of trading volume and returns. Due to decarbonization movements, winter heating demand, and supply instability, natural gas prices soared, drawing significant interest in related ETNs. Looking at the average trading volume over the past six months, Samsung Inverse 2X WTI Crude Oil Futures (5.26 million shares), Samsung Leverage WTI Crude Oil Futures (4.81 million shares), and Shinhan Leverage WTI Crude Oil Futures (3.04 million shares) were among the top. In terms of returns over the past year (excluding those listed for less than a year), Samsung Leverage WTI Crude Oil ETN recorded a return of about 272%. Mirae Leverage Crude Oil ETN, Shinhan Leverage Crude Oil ETN, and QV Leverage Crude Oil ETN all posted returns around 249%, followed by Samsung Leverage Natural Gas (122%).

However, compared to the ETF market (524 items, net assets of 69.8 trillion KRW), the ETN market remains a small market. Competition with ETFs is also not easy, as investors do not find ETN products as familiar or attractive compared to ETFs. An industry insider said, "Even if the product itself is attractive, investors tend to look for familiar names like ‘KODEX’ and ‘TIGER.’ They seem to find the structure of ETNs relatively more complicated compared to ETFs." Despite Shinhan Financial Investment launching a Metaverse ETN product a month ahead of the Metaverse ETF, net purchase amounts over the past five trading days showed Shinhan FnGuide Metaverse ETN at 600 million KRW, while KODEX Metaverse ETF was 77.9 billion KRW.

A Korea Exchange ETN market official stated, "Not only familiarity with the products but also the fact that ETNs are classified as securities in the retirement pension market, making inclusion difficult, puts ETNs at a disadvantage compared to ETFs in terms of growth. We plan to launch a variety of structured products, including the previously popular short call ETNs."

This content was produced with the assistance of AI translation services.