[Investment Trend Column] What Sets the Current Favorite, Active ETFs, Apart?

Active ETF Net Assets Near 100 Trillion Won
Half of Newly Listed ETFs Are Active
Rapid Stock Rotation Enables Swift Response to Market Changes
Growth Expected as Government Eases Regulations

As the Exchange-Traded Fund (ETF) market continues to grow rapidly, active ETFs are drawing significant attention. This is due to their ability to respond more nimbly to increased stock market volatility. Recently, the government has eased regulations related to active ETFs, and industry observers expect active ETFs to become the dominant trend.

According to the Korea Exchange on March 12, the net asset value of active ETFs stood at 96.2194 trillion won as of the end of February, approaching the 100 trillion won mark. This represents an increase of more than 50% compared to the same period last year. In 2024 alone, the net asset value has grown by about 5 trillion won. Active ETFs' net assets have expanded rapidly, rising from the 12 trillion won range in 2022 to about 60 trillion won in 2024, and surpassing 90 trillion won last year.

The number of new listings is also on the rise. Of the 19 ETFs newly listed this year, 9 were active ETFs. Last year, 69 out of 173 new ETF listings were active ETFs, accounting for about 40% of the total, but this year the proportion has increased to nearly half.

In the case of the Kosdaq active ETFs that debuted on March 10, individual investors' net purchases reached as much as 580 billion won on the first day of listing. Individuals bought 296.9 billion won worth of KoAct Kosdaq Active and 284.7 billion won worth of TIME Kosdaq Active, ranking first and second in daily net purchases, respectively. This marks the first time in Korea that active ETFs based on the Kosdaq index have been listed. KoAct Kosdaq Active, in particular, rose by more than 11% on the first day of trading, recording the highest return among all ETFs except for leveraged and inverse ETFs.

The growing popularity of active ETFs can be attributed to their ability to respond quickly to market changes. While traditional ETFs passively track a specific index, active ETFs employ a strategy in which fund managers directly select stocks and adjust weightings in pursuit of returns that outperform the index (alpha returns). Passive ETFs that follow a benchmark index only rebalance their portfolios periodically according to predetermined rules, whereas active ETFs can respond to market conditions in real time. If a sudden crisis causes a spike in market volatility, active ETFs can quickly shift to more defensive stocks. They can also immediately reflect rapidly changing industry trends, without waiting for the next index rebalancing date.

Yonghee Han, a researcher at Growth Research, stated, "With the normalization of interest rates, entrenched inflation, and the expansion of geopolitical risks, global liquidity is shrinking and volatility is becoming constant. As a result, it is becoming difficult to ensure investment efficiency through passive, market capitalization-weighted strategies alone. The importance of proactive management that incorporates promising stocks outside the index in advance is rising," adding, "Active ETFs are emerging as a proactive investment tool that can compensate for the limitations of index-based investing in this environment."

Of course, there are drawbacks. While fund managers' active involvement and rapid response to market conditions are strengths, this also means that outcomes are highly dependent on individual managers' decisions, posing a risk factor. Higher costs are another weakness, as management fees for active ETFs are relatively higher than those for passive ETFs.

The recent move to relax regulations is also expected to create a positive environment for the growth of active ETFs. In January, financial authorities announced plans to abolish the correlation coefficient regulation, which had been cited as a restriction on active ETF management. Under current regulations, active ETFs are required to maintain a correlation coefficient of 0.7 or higher with their benchmark index. Donghui Yuk, Head of ETF Product Marketing at KB Asset Management, said, "So-called 'fully active ETFs,' which can be managed freely without a correlation coefficient requirement, will allow for even faster responses to market conditions. Going forward, active ETF products are likely to become even more popular."

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