KOSDAQ Active ETFs Attract 1 Trillion Won, But Lag Behind Index Returns

More than 1 trillion won in retail investor funds has flowed into South Korea's first KOSDAQ Active Exchange-Traded Funds (ETFs), but their actual returns have been poorer than the KOSDAQ index. Active ETFs are designed to aim for higher returns than typical index-tracking ETFs by having fund managers directly adjust investment selections and weightings. Contrary to expectations of picking high-growth potential stocks, the products have shown performance that failed to meet market expectations.

Two products, Samsung Asset Management's 'KoAct KOSDAQ Active' and Timefolio Asset Management's 'TIME KOSDAQ Active,' attracted over 1 trillion won in retail investor capital immediately after their listing. This inflow is analyzed as a result of investors rapidly converging due to a combination of expectations for KOSDAQ market revitalization and a projected rebound in growth stocks.

Over the month following their listing, both products recorded double-digit declines, a drop steeper than that of the KOSDAQ150 Index over the same period, indicating limitations in the active strategy. The poor performance is attributed to portfolio composition. KOSDAQ Active ETFs tend to have a high weighting in small- and mid-cap growth stocks and bio-related companies. As market volatility increased, these stocks experienced more significant swings, directly impacting the ETF's returns. The strategy aimed at outperforming the index has ironically led to underperformance.

Active ETFs are structurally designed to achieve higher returns than the index if the fund manager's judgment is correct, but conversely, losses can also be magnified if their judgment is flawed – a double-edged sword. Given the KOSDAQ market's characteristic high proportion of less liquid stocks, price fluctuations in specific stocks have a significant impact on the overall ETF returns. The 'wag-the-dog' phenomenon, where ETF inflows boost the prices of underlying stocks only for investors to bear losses during subsequent corrections, is another variable to consider when investing.

Before investing in KOSDAQ Active ETFs, investors should check three key factors. First is the management strategy: understanding which sectors and stocks are concentrated on and how growth and value stocks are weighted is crucial. Second is fees; active ETFs typically have higher management fees than passive ETFs, which can significantly impact long-term returns. Third is the tracking difference (or spread), where a market price higher than the net asset value can increase the risk of price adjustments.

KOSDAQ Active ETFs are designed with the expectation of 'outperforming the index,' but in practice, they are structured to endure greater volatility than the index. With the potential for both outperformance and underperformance, they should be viewed more as high-risk investment products rather than simple growth investment vehicles. Successful investment in KOSDAQ Active ETFs hinges not just on returns but on 'the ability to withstand market volatility,' and outcomes can vary significantly based on the management strategy and investor choices.