ETFs Outperform Their Benchmarks but Face Delistings... Tripped Up by 'Correlation Coefficient' [Active Era] ②

Five Active ETFs Delisted This Year

Number of ‘Below Standard’ Disclosures Surges to 609

“Purpose of Active ETFs for Alpha Clashes with Rule

Correlation Coefficient Regulation Exists Only in Korea”

Active Exchange-Traded Funds (ETFs), which have been on a growth trajectory, are seeing a spate of recent delistings. The reason lies in the correlation coefficient rule, which serves as an indicator of how faithfully an ETF tracks its benchmark index. There have even been cases where an ETF that outperformed its benchmark was delisted due to local regulations, prompting calls for a revision of the system.

According to the financial investment industry on September 8, following the delisting of four active ETFs from Korea Investment Management in July, one ETF managed by Timefolio Asset Management was also delisted last month after failing to meet the correlation coefficient requirement. The correlation coefficient measures how similarly an ETF moves in relation to its benchmark, expressed as a value between -1 and 1. Under current Korea Exchange regulations, an active ETF is subject to delisting if its correlation coefficient remains below 0.7 for three consecutive months. These products fell below the required threshold as they adjusted their portfolios in pursuit of outperforming their benchmarks.

The issue is that these products were unable to avoid delisting despite delivering strong performance relative to their benchmarks. From an investor's perspective, this means the disappearance of high-performing investment options. For example, as of June 26, the ACE Apple Value Chain Active ETF by Korea Investment Management recorded a one-year return of 167.75%, outperforming its benchmark, the 'Bloomberg TOP30 Supply Chain Plus Apple Index,' by 28.12 percentage points. TIME US Dividend Dow Jones Active ETF registered a one-year return of 36.06% as of May 14—the final day of its active management approach—surpassing its benchmark, the 'Dow Jones U.S. Dividend 100 Index (KRW-converted),' by 9.42 percentage points.

There is growing criticism that the correlation coefficient regulation undermines the fundamental purpose of active ETFs. These products are designed to pursue excess returns based on the manager’s capabilities, but the pursuit is stifled by the need to maintain the required correlation coefficient. A financial investment industry official said, "Active ETFs are inherently designed to seek excess returns over their benchmark index, but the more actively a portfolio is managed to achieve outperformance, the lower its correlation with the benchmark may become. In this context, the current regulation conflicts with the intended purpose of active management. Asset managers may end up prioritizing the correlation coefficient over investment judgment just to avoid delisting. Investors, in turn, are forced to discontinue investments in strong-performing products and must seek alternatives, which is inconvenient."

South Korea is the only major advanced nation that imposes a mandatory correlation coefficient requirement for active ETFs—a so-called "Galapagos Regulation." Even in Japan, where active ETFs were most recently introduced in 2023, there is no such correlation coefficient rule. The official added, "Unlike in other major global markets, Korea alone applies a separate regulation requiring active ETFs to maintain a certain minimum correlation with their benchmark. As the domestic active ETF market grows rapidly and products and management strategies diversify, it is necessary to update these regulations in line with the pace of market development."

‘Substandard’ Disclosure Surges as Volatility Increases

The surge in the number of ETFs failing to meet the correlation coefficient standard this year is also noteworthy. According to Korea Exchange, there were 609 instances of such disclosures from the beginning of the year to September 4. This is already significantly higher than in prior years: 64 in 2025, 128 in 2024, 45 in 2023, 14 in 2022, 291 in 2021, and 102 in 2020. Compared to 2022, which saw the fewest cases, the number has soared by a staggering 43.5 times.

The industry laments that heightened market volatility has made it increasingly difficult to meet the correlation coefficient requirement. The KOSPI began the year at the 4,300 level, surged to 9,000, and then dropped to around 6,600—a swing wider than anything seen before. Global markets also experienced sharp corrections due to turmoil sparked by U.S.-Iran tensions since March and concerns over the semiconductor cycle peaking in July. Korea Investment Management, while informing investors of ETF delistings related to correlation coefficient breaches, stated, "Although we took corrective measures such as portfolio adjustments to restore the correlation coefficient, the extreme market volatility made it impossible to recover to the 0.7 threshold."

Given the nature of the correlation coefficient—which is hard to recover once it deviates—and the heightened volatility, some say the regulation’s three-month grace period is too short. Because the correlation coefficient equally weights daily returns over a set period, even if managers realign portfolios to match the benchmark, segments with low correlation continue to exert lingering influence. An asset management company official commented, "Until now, the market has never been this volatile. If it is impossible to meet the 0.7 threshold by tracking the benchmark almost identically for three months after a deviation, then it would be more appropriate to relax either the three-month period or the 0.7 benchmark threshold."

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