Overview of Korean ETF Market 2010. 8 1
Agenda About ETFs Overview Key success factors of ETFs New Trends of Korean ETF Industry Challenges to Korean ETF Industry 2
About ETF 3
What is ETFs ETFs are open-end index fund listed on exchange to trade like individual stock - Index fund : Tracking index, Low expense, Low turn over - ETFs : Real-time trading on stock exchange Innovative new financial product in the last two decade The first ETF is launched in US in 1993 (Source : KRX, Samsung AMC) 4
Flow of ETFs Cash Investor Stock Exchange ETF Liquidity Providing Value of PDF= Value of Creation unit PDF is a stock basket of 1 Creation Unit of ETFs Authorized Participants PDF ETF Manager AP(PD) : Authorized Participant ETF - Brokerage Firms which have rights to create and redeem ETFs 5
Advantages of ETFs High Accessibility : Easy to trade through Exchange like stocks Low Cost : relatively low cost than mutual fund Transparency : Fund portfolio opened to public Liquidity : easy liquidation Modularity : Excellent investment vehicle for asset allocation and other strategy (Source : KRX, Samsung AMC) 6
Overview 7
Growth of Korean ETF Market Rapid Growth of ETF Industry First Korean ETFs listed on 2002 40000 35000 Net Asset Value(KRW) Number of ETFs 60 50 NAV increased 10 times since 2002 30000 # of Product : 4 to 58 (as end ofq2 2010) 25000 40 # of ETF Management Company 20000 30 : 3 to 9 15000 10000 20 5000 10 0 2002 2003 2004 2005 2006 2007 2008 2009 0 (Mil/USD) 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q2 NAV 283 586 459 795 1,678 2,579 2,695 3,237 3,941 (Source : KRX, Samsung AMC) # of ETFs 4 6 4 6 12 21 37 50 58 8
Position in Asia-Pacific ETF market ETF Issuers Ranked by AUM (Source : DB) 9
Highly active ETF market in ASIA Korean ETF is very actively traded than other ETFs in Asia-Pacific Market (Source : DB) ETF Issuers Ranked by daily average Volume 10
Variety of Korea ETF Market Variety of Product Diversified Product Line-up Domestic equity ETF dominates ETF market and Bond ETF is growing fast recently (Source : KRX, Samsung AMC) Number of Product by type Type Broad Market 12 Leverage&Inverse 6 Thematic 10 International 6 Sector 14 Style 3 Commodities 1 Fixed Income 6 # of ETFs Bond, 22.14% Share(%) By exposure Commodities, 0.21% International, 4.15% Total 58 Domestic Equity, 73.50% 11
Who trades ETFs in Korea? Daily Average Traded value (MIL. KRW) of ETF in Korea by investor Institutional Investor (Fund, Broker) is the largest user of ETFs As end of 2009, Institutional Investor 57.7%, Individual 19.2%, Foreigner 23.1% (MIL. KRW ) 80,000 70,000 60,000 50,000 40,000 30,000 Institutional Investor Individual Investor Foreign Investor 20,000 10,000 0 2005 2006 2007 2008 2009 (Source : KRX ) 12
Why they trade ETFs? Institutional Investor Fund : Enhancing Index fund, Arbitrage trade, Core-Satellite Strategy Broker & Dealer : Arbitrage trade, Wrap account Bank : Trust product, Proprietary Investment Insurance Company : Variable Insurance, Proprietary Investment Foreign Investor Arbitrage trade Long-term Investment To avoid regulation (prohibit to buy stocks of telecommunication Sector). Individual Investor Long-term Investment, Short-term Trade, ETF Accumulation Investment 13
Samsung Kodex ETFs Dominant & Best ETF Originator and Manager Samsung s market share of Korea ETF market is more than 50% Kodex 200 is, by itself, more than 1.3 Bil USD Accomplishment Highlights Oct. 2002: KODEX 200, the first ETF, was listed in KSE Sep. 2007: KODEX China H, the first overseas ETF, listed Nov. 2007: KODEX 200 listed in Tokyo Stock Exchange Samsung, 46.8% Samsung, 46.8% Advisor of TDEX ETF (Thailand ETFs) since Sept. 2007 SEP 2009 : First Bond ETF in KOREA, First -1X inverse ETFs in ASIA FEB 2010 : First 2X Leverage ETFs in ASIA 14
Key success factors of Korean ETF Market 15
1. Regulation 2. Liquidity 3. Cooperation with AP & LP 4. Marketing & Education 5. Others 16
1. Regulation 17
Regulation Samsung cooperates with KRX closely to enact regulation to make ETF market efficiently - Easy program trading - Exemption of short selling restriction - Exemption of downtick rule Samsung proposes the change of regulation for New type ETF (Financial investment service act; effective from Feb., 2009) - expands underlying asset: Fixed income/ commodity ETF - way of managing portfolio is diversified (leveraged ETF and Inverse ETF) note, swap (multi-swap counter party) 18
Regulation-short selling KRX Stock Market Business Regulation; - 17 Restriction on short selling Exception on short selling restriction 6. Cases where the settlement of the ETFs is possible by the settlement date with the sale of the ETFs to be delivered as a result of a request for issuance of new shares or additional creation units; 7. Cases of selling shares to be delivered as a result of a request for repurchase of ETFs, where settlement is possible by the settlement date; 19
Regulation-Trade Cycle short selling of ETF and equity short selling for ETF is key system of liquidity providing - AP or MP can sell and buy ETF unlimitedly without any capital and stock of ETF (Source : Black rock ) ETF trade is not restricted by cash liquidity and stock of ETF on T-day T+2 Cycle in Primary Market T+2 Cycle In Secondary Market 20
Regulation-Trade Cycle In case of short selling ETF - Sell overvalued ETF, Buy Basket of stocks (PDF) [T day] Short selling : ETF Buy stock basket (PDF) of ETF from market Request creation of ETF [Settlement day] + Cash from ETF selling - ETF Settlement - Cash for Basket Purchase Stock basket of ETF In-Kind Creation + ETF 21
Regulation-Trade Cycle In Case of short selling of stock basket - Sell overvalued stock basket (PDF), Buy ETFs [T day] Short selling: Stock Basket (PDF) Buy ETF from market Request redemption of ETF [Settlement day] + Cash from Stock basket selling Settlement - Cash for ETF Purchase ETFs In-Kind Redemption - Stock basket + Stock basket 22
2. Liquidity 23
Liquidity- Two forms of ETF liquidity ETF liquidity is not everything that you see Traded volume of ETFs is not the mirror of liquidity ETF liquidity can be supplied from creation and redemption process Liquidity of underlying Asset is the determinant of ETF liquidity. Real ETF Liquidity Liquidity of ETFs Liquidity of underlying asset & Futures Liquidity supplied by secondary market of ETF Individual investors Market makers Liquidity supplied from creation/redemption Market maker can maintain competitive bidoffer spread by using Futures 24
Liquidity- ETF with no Futures sharing benchmark Liquidity providing by LP is a kind of arbitrage trade based on absolute value Bid by LP Spread Must Bid > NAV > Ask ETF NAV = (PDF х Price)/Unit of CU Ask by LP For hedging - Maintaining inventories - Borrowing baskets or ETFs - Split the basket - Market Impact & Tracking Error 25
Liquidity- ETF & Futures sharing the same benchmark Liquidity providing is arbitrage trade based on futures basis ETF price of LP is decided by Futures basis Futures market with deep liquidity is required (ex. Kosip200 index futures market) Case #1 Market situation is favor to cash & Carry arbitrage(futures is traded at premium) Step 1 : Buy Basket & sell Futures (Cash & Carry) Determine basis of entry Step 2 : Request Creation of ETFs Step 3 : Sell ETF in lower level of Basis of entry (Position Unwinding) Case #2 Market situation is favor to reverse cash & Carry arbitrage Step 1 : Borrow Basket or ETFs Step 2 : Request creation of ETFs Step 3 : Sell ETFs, Buy futures (reverse cash & Carry) Determine basis of Entry (LP should forecast for fair level of basis) Step 4 : Buy Equity Basket, Sell Futures (Position Unwinding) at better level than entry 26
Liquidity- ETF Arbitrage in Korea Tax Advantage : Exemption of Transaction tax 0.3% to sell ETFs The difference of Tax has encouraged Arbitrage trade based on ETF ETF liquidity EX) KOSPI200 Intraday Basis (Contango) With TAX (Stock) Arbitrage Cost Without TAX(ETF) Market Basis=Futures-Equity(KOSPI200) 1 0.9 0.8 0.7 [Basis] With tax Transaction TAX 0.6 0.5 Transaction Cost Transaction Cost 0.4 0.3 Without tax Theoretical Difference Theoretical Difference 0.2 0.1 (Implied interest) (Implied interest) 0 09:00:00 09:06:00 09:12:00 09:18:00 09:24:00 09:30:00 09:36:00 09:42:00 09:48:00 09:54:00 10:00:00 10:06:00 10:12:00 10:18:00 10:24:00 10:30:00 10:36:00 10:42:00 10:48:00 10:54:00 11:00:00 11:06:00 11:12:00 11:18:00 11:24:00 11:30:00 11:36:00 Less Opportunity for Arbitrage More Opportunity for Arbitrage Arbitrage Possible Line (Source : Samsung AMC ) 27
3. Cooperation with AP&LP 28
Cooperation with AP/LP : Fee Structure - APs and LPs earn fee paid by fund - AP/LP Fee is good incentive for AP(LP) s Marketing activities for ETF Fee Structure of ETFs Entity Management AP/LP Custodian other Fee (bp) 20~60 5~20 3~5 2~3 29
Cooperation with AP/LP : Other Compensation Co-work with ETF Manager and AP/LP is crucial to the success of ETF business - Cooperative AP&LP should be compensated. - Keep strong and strategic partnership Compensation for AP/LP ETF Manager AP/LP Strategic Alliance Ex) KODEX Consortium AP/LP Performance Evaluation Compensation from manager 30
4. Marketing & Education 31
Create demand Massive Education Campaign & PR: common activity - Keep educating retail and institutional investors for the use of ETF by media Creates distribution channel: Korea specific activities - low fee - multi asset class investing 32
Distribution channel of Kodex ETF Various channel to invest in Kodex ETF Kodex ETF is traded on stock exchange just like stocks Kodex ETF can be sold by private bankers in brokerage firm and bank Exchange Bank Brokerage firm Insurance company - Trading - Bank Trust Product -Wrap Account (SMA) - Automated Investment Plan New distribution channel for ETF - Variable Insurance Liquidity Long term investment Success of ETFs Product 33
New channel - Bank Bank : the largest financial sector in Korea Korean Banks has the most powerful distribution channel But Bank can not run brokerage business They can handle ETFs only in trust product Samsung and LP set up new trading system for ETF investment in trust product Bank LP Stock Exchange Bank trust product Which invest in ETFs Implement orders as given by bank 34
New product:fund of ETF-Brokerage Firm Brokerage firm : Seeking New profit source and new Business WRAP account based on various investment strategy is new business of Korean brokerage firm. ETF is perfect product for wrap account and Asset allocation ETF WRAP account Customized, flexible, Transparent Investment Asset Allocation Rotation Strategy Oversea Investment Equity ETF Style ETF Country ETF Fixed Income ETF Sector ETF Region ETF 35
Demand of global ETF Market Since 2000, Investment Advisor leads boom up of global ETF market Institutional investors have embracing ETFS for multi asset class investing Marketing target for ETFs is changing from institutional to retail investors - Massive education campaign to build investment advisor market is successful Early Period Growth Period Education Campaign Institutional investor Retail Investor Institutional investor (Source : BLACKROCK ) 36
5. Others 37
Timing for product launch Samsung KODEX China H is the largest oversea ETF in Korea KODEX China H tracks HSCEI INDEX Issued ETF unit of KODEX CHINA H ETF Inception date : OCT 10 th 2007 Year 2007 is in the middle of CHINA BOOM 14,000,000 12,000,000 ISSUED ETF Unit Size of ETF grew by 6 times only in 1 month after inception; the fastest growth among Korean ETFs The most hot product in 2007 Timing was the success factor of ETF 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2007-10-10 2007-10-17 2007-10-24 2007-10-31 2007-11-07 2007-11-14 2007-11-21 2007-11-28 2007-12-05 2007-12-12 2007-12-19 (Source : Samsung AMC ) 2007-12-26 2008-01-02 2008-01-09 38
Creativeness Samsung KODEX Samsung group ETF is the most successful product except KOSPI200 tracking ETF Unique product of Korea ETF which tracks Samsung group Index Second largest ETFs among Samsung Kodex ETFs 70,000,000 60,000,000 50,000,000 ETF unit of Kodex Samsung Group ISSUED ETF Unit The name Samsung is the most reliable and 40,000,000 trustworthy to local Investors 30,000,000 20,000,000 Better return than that of KOSPI200 10,000,000 Creativeness is the success factor of ETF 0 21-May-08 21-Jul-08 21-Sep-08 21-Nov-08 21-Jan-09 21-Mar-09 21-May-09 21-Jul-09 21-Sep-09 21-Nov-09 21-Jan-10 21-Mar-10 (Source : Samsung AMC ) 39
Meet investor s needs KODEX leverage ETF and KODEX Inverse ETF is the successful trading tool for individual investor Traded volume of KODEX Leverage ETF exceeds that ofkodex200 which is the largest ETF in Korea 8,000,000 ETF unit of Kodex Samsung Group (# of traded Unit of ETFs) KODEX Leverage becomes the most actively traded ETF 7,000,000 in only 7 months after inception 6,000,000 KODEX inverse ETF is also heavily traded. Leverage ETF can compensate the weakness of low volatility of unleveraged ETF 5,000,000 4,000,000 3,000,000 2,000,000 KODEX 200 KODEX Leverage KODEX Inverse Inverse ETF provides an opportunity of hedging or making 1,000,000 profit of falling market 0 22-Feb 8-Mar 22-Mar 5-Apr 19-Apr 3-May 17-May 31-May 14-Jun 28-Jun 12-Jul 26-Jul 9-Aug (Source : Samsung AMC ) 40
New Trend of Korean ETF industry 41
Fixed Income ETF Significantly growing product 7 Fixed income ETF listed, more than 20% market share of ETF market Various use by Institutional investor( Specially, Hybrid Fund) Treasury 3y ETF, Short term Bond ETF is popular to Institutional investor Growth of FIXED INCOME ETFs 1,100,000 1,050,000 1,000,000 950,000 900,000 850,000 800,000 750,000 700,000 650,000 600,000 September-09 October-09 November-09 December-09 January-10 February-10 March-10 April-10 May-10 June-10 July-10 (Source : Samsung AMC ) 42
Futures Based ETF New Type ETF of Korea is mainly based on futures Cash creation and redemption makes possible to use futures for ETF management KODEX Inverse and KODEX Leverage invest to KOSPI200 futures Advantage of Futures for ETFs - Easy to manage - No credit risk - Efficiency for LP - Various futures and 24 hour trading Market (GLOBEX) Commodities futures is good vehicle for Commodities ETF development Disadvantage - Tracking error by rolling effect 43
Challenge to Korean ETF industry 44
Termination of TAX Advantage Transaction tax exemption is terminated at end of 2011 Tax advantage is the biggest advantage of Korean ETFs Imposition of tax will lead to decrease of ETF liquidity Opportunity of Arbitrage trade will shrink Income tax is levied to oversea ETF from first day of July, 2010 Oversea ETF has had relative advantage than oversea equity fund Oversea ETF is not taxed but oversea equity fund is taxed for income tax Trading volume of Samsung KODEX China H is decreasing because of tax fear 45
Other Challenges Red-Ocean and abnormal product listing 11 ETFs has de-listed because of lack of trading volume and insufficient fund size 5 ETFs track same index(kospi200) 58 ETFs managed by 9 asset management company (as of June 2010) ETFs is not main stream of Korean Asset management industry yet Total size of equity-type fund : about 100 Bil. (USD), Total ETFs size : 4.5 bil (USD) 4.5 % of Market share 46
Appendix I 47
Product description KODEX200 ETF KODEX Samsung group ETF 400 120 340 KODEX 200 BM 100 KODEX Samsung group BM 280 220 80 160 60 100 40 02-10-11 03-10-11 04-10-11 05-10-11 06-10-11 07-10-11 08-10-11 09-10-11 The largest ETF with more than USD 1 billion of net asset value Deep liquidity: More than a million shares trading volume a day 40 08-05-20 08-09-20 09-01-20 09-05-20 09-09-20 10-01-20 The first theme ETF in Korea The most efficient way to invest in the Korean largest business group Fund KODEX200 (Bloomberg: 069500 KS) Fund KODEX Samsung group (Bloomberg: 102780 KS) Inception date 2002.10.11 Inception date 2008.5.20 AUM KRW 1,456.3 billion AUM KRW 296.2 billion Investment features BM: KOSPI 200 No. 1 ETF in terms of NAV and trading volume in Korea Dividends and interests to be distributed Investment features BM: Samsung Group Index Pioneer of theme index fund in Korea Dividends and interests to be distributed Sharpe ratio since inception Sharpe ratio since inception Performance History, net of fees % Fund 6m 0.44 1y 54.21 3y 16.15 Since inception 236.49 Performance History, net of fees % Fund 6m -2.64 1y 65.39 3y na Since inception 0.37 BM -1.07 52.11 9.59 182.10 BM -3.33 65.36 na -0.68 As of Feb. 28, 2010 Performance in the below table assumes that dividends collected in the funds are reinvested. 48
Product description KODEX China H ETF KODEX Inverse ETF 120 110 KODEX China H BM KODEX Inverse Underlying Index 100 105 80 100 60 95 40 07-10-09 08-04-09 08-10-09 09-04-09 09-10-09 The first overseas ETF in Korea The lowest total investment expense among China funds in Korea 90 09-09-14 09-10-14 09-11-14 09-12-14 10-01-14 10-02-14 The first Inverse ETF in Asia The 2 nd deepest daily trading volume among the ETFs in Korea Fund KODEX China H (Bloomberg: 099140 KS) Fund KODEX Inverse (Bloomberg: 114800 KS) Inception date 2007.10.9 Inception date 2009.9.14 AUM KRW 140.5 billion AUM KRW 58.6 billion Investment features BM: HSCEI Index Replication Investment features Underlying Index: F -KOSPI 200 Targeting -100% of the daily Underlying Index change Sharpe ratio since inception Sharpe ratio since inception Performance History, net of fees % Fund 6m -8.17 1y 26.90 3y na Since inception -16.73 Performance History, net of fees % Fund 6m na 1y na 3y na Since inception -3.63 BM -7.90 26.00 na -18.30 U. I. na na na 2.47 As of Feb. 28, 2010 As of Mar. 10, 2010 49
KODEX Leverage ETF 110 KODEX Leverage Underlying Index 105 100 95 90 10-02-17 10-02-22 10-02-27 10-03-04 10-03-09 The first Leveraged ETF in Asia The only 200% Leveraged fund in Korea Fund Inception date AUM KODEX Leverage (Bloomberg: 122630 KS) 2010.2.22 KRW 44.4 billion Investment features Underlying Index: KOSPI 200 Targeting 200% of the daily Underlying Index change Sharpe ratio since inception Performance History, net of fees % Fund 6m na 1y na 3y na Since inception 5.74 U. I. na na na 2.05 As of Mar. 10, 2010 50