Delisted for Outperforming Expectations? What Happened to These "High-Flying" ETFs [Weekend Money]

Next month, several active Exchange-Traded Funds (ETFs) will be delisted en masse for "failing to meet standards." What draws particular attention is that the removal of these ETFs is not due to poor management, but rather because they delivered performance that far exceeded market expectations.

According to the financial investment industry, starting with the delisting of "ACE TDF2030 Active" managed by Korea Investment Management on July 7 next month, three other funds—"ACE Apple Value Chain Active," "ACE Long-Term Asset Allocation," and "ACE TDF2050 Active"—will also be removed from the stock market on July 9. "TIME Global Top Pick Active" by Timefolio Asset Management is also subject to delisting for the same reason, but has been exempted thanks to a provision that temporarily suspends the regulation for new products that have not yet reached one year since listing.

Regulations specify two main reasons for ETF delisting. One is being "shunned by the market" if total net assets remain under 5 billion won for a year after establishment. The other is failing for three consecutive months to meet the "correlation coefficient" standard, which measures how closely an ETF tracks its benchmark index. Previously, most ETFs removed from the market were delisted due to insufficient trading volume or lack of funds. This is the first time, however, that ETFs are being delisted for achieving returns far above their benchmark indices.

The issue stems from the correlation coefficient rule of 0.7, which applies to active ETFs. A correlation coefficient closer to 1.0 means the ETF closely mirrors its benchmark index, while a coefficient nearer to 0 means it moves independently. For passive ETFs, which replicate their target indices, the benchmark is 0.9. For active ETFs, where fund managers exercise discretion, the requirement is 0.7. However, if an active ETF significantly outperforms its benchmark, the correlation coefficient can fall below 0.7.

For example, "ACE Apple Value Chain Active," which is now subject to delisting, posted a return of 170.73% over the past year. This is 53.94 percentage points higher than its benchmark return of 116.79%. Other TDF active funds also outperformed their benchmarks by as much as 4.96 percentage points. Because these ETFs delivered higher returns than the market index, the correlation coefficient with the benchmark paradoxically dropped below the required 0.7, triggering the delisting condition.

This has led some in the asset management industry to argue that it is problematic for excellent performance to become a reason for delisting. An official from one asset management firm stated, "There are now cases where, to avoid delisting, we have to deliberately lower returns and adjust our performance to match the index, even though we could deliver higher yields."

In contrast, the Korea Exchange insists that the regulation is essential for investor protection. They explain that the correlation coefficient requirement for active ETFs is not simply intended to limit returns, but is a minimum safeguard to ensure that a product is managed in accordance with the character and strategy promised to investors at launch.

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