Regulators plan to fuel growth to ETF market

Retirement and pension funds may be allowed to engage in ETF to nurture long-term investment


Korea’s financial regulators plan to nurture the fledgling ETF market by allowing pension and retirement funds to engage in the investment vehicle in question as part of efforts to encourage long-term investment practices.

The country’s financial regulators led by the Financial Services Commission are reviewing options aimed at giving an impetus to the ETF market starting from early next year. ETF, or exchange-trade fund, is an investment fund traded on stock exchanges with attractive features such as low costs, tax efficiency and stock-like characteristics.

In October, the FSC already set out to conduct a preliminary research on possible measures to strengthen the ETF market. Separately, the FSC and the Korea Exchange will jointly form a task force to help the ETF market get a firmer footing.

The FSC’s preliminary research includes options to allow retirement and pension funds to buy ETFs. Under current law, retirement fund operators cannot put ETFs in their portfolios.

An amendment to the related law or a revision to the regulation might be adopted so that retirement funds could increase the holdings of ETFs. The National Pension Service, the country’s biggest pension fund in Korea, does not handle ETFs according to its internal rules.

The growth of the ETF market is a key topic for regulators as it remains in its early stage. The total assets of the domestic ETFs climbed to 10 trillion won ($8.77 billion) this year, up from 344.4 billion won in 2002, but the specialized market is just 1 percent of the KOSPI in scale. The ETF market in the U.S. is estimated to be about 5 percent of its main bourse.

As ETFs track indexes, they tend to have lower risks compared with other investment tools that follow specific companies on the stock market. Combined with less volatile price fluctuation, ETFs are deemed a financial instrument for long-term investment, something that the local regulators want to settle in the Korean market.

In recent weeks, the financial authorities here unveiled a plan to give tax incentives to investors who would opt for long-term funds, though details are yet to be worked out.

Korea has one of the most volatile stock markets in the world, largely because of high-frequency trading practices and the heavy proportion of financial derivatives products.

By Yang Sung-jin (insight@heraldcorp.com)