South Korea greenlights single-stock ETFs for Samsung and SK hynix
The government will allow single-stock exchange-traded funds (ETF) tied to individual companies - such as Samsung Electronics and SK hynix - on the domestic market, aiming to draw back investor demand that has been flowing overseas.
A revision to the Enforcement Decree of the Financial Investment Services and Capital Markets Act was approved at a Cabinet meeting, the Financial Services Commission (FSC) said Tuesday, enabling the measure to be implemented. The revised measure is set to take effect on April 28.
Domestic asset managers are expected to launch item-tied ETF products next month, following completion of securities registration and listing reviews. ETFs based on Samsung Electronics and SK hynix could become available on the domestic stock market as early as May 22.
ETFs are funds designed to track the returns of specific stock indexes or other underlying assets and can be traded in real time on exchanges. They offer the advantage of diversification by bundling multiple stocks while remaining easy and quick to trade.
However, in Korea, regulations requiring ETFs to include at least 10 stocks and limiting each stock's weighting to 30 percent have drawn criticism for pushing investment demand overseas, including to the United States and Hong Kong, where single-stock ETFs are already active.
In response, the government has decided to allow single-stock ETF products limited to leading domestic companies. Eligible stocks must meet criteria such as accounting for at least 10 percent of market capitalization, at least 5 percent of trading value, at least 1 percent of derivatives trading volume and maintaining an appropriate investment grade.
Currently, only Samsung Electronics and SK hynix meet these requirements.
The permitted leverage ratio will be capped at plus or minus 2x, reflecting the nature of leveraged products, which are highly sensitive to changes in the underlying asset price.
The revised standards will also apply to exchange-traded notes, according to the FSC.
The government also plans to strengthen investor protection measures as the expansion of leveraged investment increases the risk of losses.
However, the mandated education session for ETF investors will be expanded to ensure maximum investor safety.
The mandatory preinvestment education for leveraged ETF investors will be extended from one hour to two hours, covering topics such as negative compounding effects, leverage effects and tracking error risks. To emphasize that these are not diversified investments, product names will exclude the term "ETF" and instead include terms such as "single-stock," "leveraged" or "inverse."
The revision also includes provisions allowing weekly options products based on individual stocks and ETFs. Options are derivative financial instruments that grant the right, but not the obligation, to buy or sell an underlying asset, such as a stock, at a predetermined price upon maturity. Weekly options, which expire every week, offer advantages in responding to short-term volatility or hedging risks.
Previously, only products based on indexes such as the Kospi 200 and Kosdaq 150 were available.
Based on market capitalization and other factors, weekly options products for four individual stocks - Samsung Electronics, SK hynix, Hyundai Motor and LG Energy Solution - are scheduled to be listed on June 29. Weekly options products for ETFs are set to be introduced in the second half of the year.
