[The Golden Age of Active ETFs]③When Will "Fully Active ETFs" Arrive?... "Gradual Easing and Safeguards Needed Urgently"

Delayed Introduction of Fully Active ETFs Without Correlation Coefficient
Number of U.S. Active ETFs Jumps 4.8 Times After Regulatory Improvements
Industry: "Even Easing from 0.7 to 0.5 Is Necessary"
Calls for Strengthened Disclosure to Protect Investors

The government announced earlier this year that it would relax correlation coefficient regulations and introduce fully active exchange-traded funds (ETFs). However, as momentum has waned, discussions around these initiatives have stalled for several months. Despite the fact that Korea's active ETF market is experiencing rapid growth, having surpassed 100 trillion won in net assets, the lack of timely institutional support is delaying the market's qualitative advancement.

Stagnant Discussions on Fully Active ETF Introduction... Overseas, Loosened Regulations Accelerate Active ETF Growth

According to the financial investment industry on September 9, the task force (TF) discussions regarding relaxing the correlation coefficient for active ETFs have effectively been suspended since April. Although financial authorities initially announced plans to improve related regulations within the first half of the year, priorities have shifted toward issues such as single-stock leveraged ETFs, causing the initiative to lose momentum.

An official from the Financial Services Commission stated regarding the legislative push for correlation coefficient regulations, "We are reviewing the matter, but there is currently no detailed timeline being discussed."

Within the asset management industry, there are opinions that the lukewarm attitude of the authorities, along with the tepid response from large firms, is holding back needed regulatory improvements. An official from an asset management company said, "It is understandable that large firms that already hold significant market share are not welcoming regulatory easing, as it would encourage new entries by small and mid-sized companies. With the fallout from leveraged ETFs and related issues, authorities appear to be wary about relaxing the regulations, pushing the discussions to the back burner."

Major overseas markets are actively supporting the growth of active ETFs through swift regulatory reforms. According to the Korea Capital Market Institute, as a result of the U.S. Securities and Exchange Commission (SEC) introducing the 'ETF Rule (Rule 6c-11)' in 2019—which simplified approval procedures and allowed non-transparent active ETFs—the number of active ETFs in the United States rose from 488 at the end of 2019 to 2,324 at the end of last year, an increase of about 4.8 times (376%). The proportion of active ETFs among all listed ETFs also jumped sharply from 16.5% to 42.2%.

Yoon Sunjung, Professor of Business Administration at Dongguk University, stated, "If the true spirit behind active ETFs is to be realized, correlation coefficient regulations—which are virtually nonexistent overseas—should be abolished. Rather than a mere variation of passives, a channel needs to be created that allows managers to demonstrate their unique stock-picking capabilities."

Investor Protection Still Important... Gradual Easing and Strengthened Disclosure Are Realistic Alternatives

However, some voices argue that measures for investor protection must be put in place before completely abolishing the correlation coefficient. The concern is that, if even the basic boundaries provided by a benchmark index disappear, there could be issues such as "blind management" that involves investing in stocks unrelated to the stated concept, or poor risk management. An official from an asset management company noted, "In the United States, even though there are no correlation coefficient regulations, there are clear safeguards such as the 'Names Rule,' which requires funds to include only stocks or companies within the value chain that fit the fund's stated name. Rather than just calling for the abolition of the correlation coefficient, there should also be discussions on setting standards and guidelines so investors know what they are investing in."

Kim Daejong, Professor of Business Administration at Sejong University, said, "Correlation coefficient regulations limit the fund manager's autonomy in stock selection and pursuit of excess returns, so it would be desirable to gradually ease or ultimately abolish the regulations." He added, "However, if a complete abolition is implemented, disclosures regarding fund objectives, investment targets, and risk levels should be significantly strengthened so that investors can clearly understand a product's risks and management strategy. By eliminating regulations while enhancing investor protections, autonomy in fund management could be expanded and product transparency could be increased, which would be the appropriate direction for institutional reform."

Another asset management industry official commented, "Fully active ETFs, which involve removing the benchmark index altogether, should be permitted only after a rigorous review for new products; for existing products, it would be appropriate to ease the current correlation coefficient requirement from 0.7 to around 0.5, thereby providing more operational flexibility. Unlike the introduction of fully active ETFs, easing the correlation coefficient requirement can be pursued by amending the Korea Exchange's listing regulations without the need for revision of the Capital Markets Act. Therefore, it is important for the industry and the Exchange to promptly resume discussions so that, if possible, institutional improvements can be achieved within this year."

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