"Why Isn't My ETF Rising Like the Index?" "Delisted for Outperforming?"... The Secrets of Premium Rate and Correlation Coefficient [Investment Barometer]

Widening Premium/Discount Rate Amid Market Volatility
3,890 Disclosures on Excessive Premium/Discount Rate in First Half of the Year
Sharp Increase in 'Trading Halt' Incidents: 12 Cases in First Half
Multiple Active ETFs Delisted Due to Cor

Recently, the ongoing volatility in the market—driven by the expansion of global geopolitical risks—has raised red flags in the exchange-traded fund (ETF) market. The divergence between the underlying index and ETF prices, leading to value distortion, has been intensifying. Experts advise that during volatile market conditions, investors must check two key indicators when investing in ETFs: the “premium/discount rate (tracking error)” and the “correlation coefficient.” These metrics show whether invested money is being properly valued and whether the product is being managed stably.

Surge in Tracking Error and “Extract” Cases

According to the Korea Exchange on July 2, the number of disclosures reporting excessive ETF tracking errors reached 3,890 cases in the first half of this year. In just six months, this figure has already surpassed the annual total for last year. The number of disclosures for excessive ETF tracking errors has been rising steadily each year: 2,227 cases in 2023, 3,083 in 2024, and 3,802 in 2025.

Beyond simple disclosures, cases of “extraction”—a risk stage where actual trading may be restricted—are also increasing rapidly. According to Korea Exchange regulations, ETFs requiring investment caution due to widening tracking errors can be designated as “extracted → preliminary designation → final designation” in stages. If the real-time tracking error at the close exceeds twice the management threshold (3% for domestic assets, 6% for overseas assets), the ETF becomes subject to extraction. If, within 10 trading days after extraction, the extraction criteria are met again, the ETF receives a “preliminary investment caution designation.” If the tracking error widens further, it is ultimately designated as an “investment caution item.” Once designated as such, single-price trading is implemented every three trading days, and trading may be suspended.

Even before the official designation as an investment caution item, there were a total of 12 extraction cases in the first half of this year alone. This is three times higher than the 4 cases in the first half of last year and far exceeds the annual total of 8 cases for all of last year. Compared to the first half of 2024 (7 cases, out of a total of 30 for that year), this year’s sharp increase is exceptional.

The tracking error is an indicator expressed as a percentage that shows the difference between an ETF’s actual value—its net asset value (NAV)—and its market trading price (closing price). Simply put, the NAV is the “true value” of the ETF, while the market price is determined by supply and demand. A positive tracking error means investors are paying a premium above the actual value, while a negative tracking error means it is undervalued and trading at a discount.

If the tracking error becomes excessively large, investors are exposed to unnecessary price fluctuation risks unrelated to the asset’s value. This distortion is especially common in small ETFs with low trading volumes, overseas stock ETFs with time zone differences, and commodity futures ETFs—so investors should exercise particular caution.

Wide Correlation Gap Forces High-Return ETFs Off the Market

If the tracking error shows “how distorted the current price is,” the correlation coefficient is an indicator of “how closely the ETF’s return tracks the movement of its underlying index.”

The correlation coefficient is expressed as a value between -1 and 1: the closer to 1, the more the ETF moves in sync with the benchmark index; the closer to 0, the more it moves independently. According to current stock market listing regulations, passive ETFs that replicate their benchmark indices must maintain a correlation coefficient of 0.9 or higher, while actively managed ETFs must maintain at least 0.7. If an ETF fails to meet these standards for three consecutive months, it is delisted from the market.

The recent mass delisting of four active ETFs by Korea Investment Management (ACE Apple Value Chain Active, three ACE TDF products, and others) is a prime example of how these correlation coefficient regulations work in practice.

These ETFs were delisted “because their returns were too high.” For active ETFs, if the return significantly exceeds that of the benchmark index, the correlation coefficient falls below 0.7. In the case of the delisted ACE Apple Value Chain Active ETF, its one-year return recently surpassed 170%, exceeding the benchmark index’s return (116%) by a full 54 percentage points. Other TDF active funds also outperformed the index by up to 4.96 percentage points. The large gap in returns between the ETF and its benchmark, due to their high performance, led to their delisting.

Experts emphasize that wise ETF investment requires checking the balance of both indicators. An asset management industry insider said, “As seen in the explosive increase in ETF tracking error disclosures and extraction cases in the first half of this year, there has been a surge in products whose prices are temporarily distorted and not properly valued in the market. It is a more stable choice to invest in ETFs with tracking errors close to 0% and correlation coefficients converging to 1 (or at least 0.7 for active ETFs).”

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