[Era of 400 Trillion Won ETFs] "Made a Quick Profit Again Today"?But Copycat Products Are a Growing Problem

The domestic ETF market has grown rapidly, but there are recommendations that improvements in investment practices and industry culture are needed for continued growth. In addition, the industry is hoping for innovation in various areas, including taxation.

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According to the financial investment industry on April 15, insiders have commonly pointed out the issue of overlapping themes among domestic ETF products. As competition intensifies within the industry amid the activation of ETF investment, a series of ETFs with similar constituent stocks are being listed, while products with low trading volumes are being delisted. Last year, products themed around "shipbuilding, defense, and nuclear power" were listed one after another; more recently, the "aerospace" theme ETFs, which have gained attention due to the SpaceX listing issue, are being launched in succession. Over the past month, three space-themed ETFs have been listed by Mirae Asset Management, Korea Investment Trust Management, and Samsung Asset Management.

Choi Youngjin, Vice President (CMO) of Hanwha Asset Management, said, "Financial institutions are putting great effort into developing products for their clients, but the practice of copying competitors' products still persists in the ETF market," adding, "Undifferentiated products and strategies are issues that must be resolved through the industry's own efforts at self-regulation."

With many ETF products tracking almost identical stocks and indices, asset management firms have all played the "fee reduction" card. While this may seem positive for investors in the short term, the industry notes that it could have a negative impact from a broader market perspective. The Capital Market Research Institute expressed concern in a report last year: "As the ETF market grows rapidly, fierce competition within the asset management industry has led to excessive fee-cutting, potentially undermining the financial health of asset management firms."

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There are also opinions that investment culture should evolve, taking into account the nature of ETFs as tools for diversified investment. The intended purpose of ETFs is to achieve better results through long-term rather than short-term investment, especially given volatile domestic and international conditions. Nam Yongsoo, Head of ETF Management at Korea Investment Trust Management, said, "We should avoid short-term trading practices such as leveraged and inverse ETFs, and instead focus on long-term investing," emphasizing, "Since investment is a function of time and direction, only by consistently investing for the long term after setting the right direction can one reap the rewards."

Kim Seungcheol, Head of ETF Investment at NH-Amundi Asset Management, stated, "Recently, there has been excessive inflow of retail investors' funds into specific themes and aggressive, concentrated ETF products in the domestic market, raising concerns about market soundness and the lack of risk management." He stressed, "ETFs are fundamentally tools to enhance investment convenience and facilitate long-term asset allocation. Investors should actively use ETFs as vehicles for growth investment, but it is important to establish a balanced investment strategy by thoroughly managing volatility through diversified asset allocation."

There are also recommendations that government-level regulations need further refinement to support ETF market growth. Previously, the Financial Services Commission relaxed regulations related to correlation coefficients for single-stock ETFs and active ETFs in order to narrow the gap with overseas ETF markets. As a result, products such as the "Samsung Electronics 2x Leverage ETF" and "fully active ETFs" can now be launched domestically.

The asset management industry has welcomed this decision by the government, but maintains that further institutional improvements are necessary. A source at an asset management company commented, "Strict regulations on the correlation coefficient for active ETFs have resulted in lower operational flexibility compared to global standards, and there are still conservative regulations on derivative and alternative investment ETFs. While the intention to protect investors is understandable, such restrictions limit the speed of innovative product launches. It is necessary to expand institutional flexibility to promote product innovation."

There is also a growing need to streamline the taxation applied to ETF investments. Recently, ETF investments have been expanding within retirement accounts, but paradoxically, when investing in domestic equity ETFs through retirement accounts, investors end up paying more tax than when investing through regular accounts. In a regular account, capital gains from domestic equity ETFs are tax-exempt, with only a 15.4% dividend income tax levied on distributions classified as "dividends." In contrast, if domestic equity ETFs are held within a retirement account and generate profits, investors must pay up to 5.5% pension income tax upon receiving pension payments, or 16.5% tax when withdrawing a lump sum. For overseas equity ETFs, a 15.4% dividend income tax is imposed on capital gains in regular accounts, while in retirement accounts, such gains are tax-exempt, and only up to 5.5% pension income tax is applied when receiving pension payments, making retirement accounts more advantageous.

A representative of a major asset management company remarked, "Unlike overseas stocks and ETFs, which are more advantageous in retirement accounts than in regular accounts, domestic equity ETFs are being discriminated against in retirement accounts. There is a need to reform the retirement pension tax system."

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