Active ETFs beat the indexes as managers make good bets

Actively-managed exchange traded funds (ETF) are performing well and are popular, and if new rules are passed, they could become more volatile and potentially more interesting to investors.

Actively-managed exchange traded funds (ETF) are performing well and are popular, and if new rules are passed, they could become more volatile and potentially more interesting to investors.

Active stock ETFs start out mirroring an index, but after that, fund managers are allowed to make targeted investments with a certain percentage of the portfolio.

According to Korea Exchange, eight stock-based active ETFs offered on May 25 had an average return of 10.88 percent through Nov. 30. The Kospi dropped 9.7 percent during the same period.

All eight performed better than the benchmark indices they were designed to track.

Timefolio Asset Management's Timefolio BBIG Active ETF, which focuses on battery, bio, internet and game companies, gained 15.55 percent during the period. Compared to the KRX BBIG K-New Deal Index, which lost 4.01 percent, the ETF outperformed by 19.56 percentage points.

Korea Investment Management's Navigator Electric Vehicles Value Chain Active ETF, which is focused on electric car companies, gained 13.51 percent. It outperformed the FnGuide Electric Vehicles Value Chain Index by 13.41 percentage points.

The Samsung Securities Kodex K-Renewable Energy Active ETF gained 17.49 percent, outperforming its benchmark index by 13.25 percentage points.

The Mirae Asset Securities Tiger Global BBIG Active ETF gained 26.75 percent, but outperformed its benchmark Nasdaq 100 by only 0.05 percentage points.

Although a new market, more investors are choosing to put their money in active ETFs. Actively managed bond ETFs were first offered in 2017. Stock-based active ETFs were first offered in September last year, but their management was automated at first. Those run by human fund managers were available only starting May 25.

Net assets in the active ETF market totaled 4.53 trillion won ($3.8 billion) as of Nov. 30. That's more than double end of last year's 2.13 trillion won.

Meritz Asset Management and Assetplus Investment Management each started offering two new active ETFs in November. Woori Asset Management, Truston Asset Management and Korea Investment Value Asset Management will start to offer active ETFs soon.

"Many fund operators think that active ETFs are the key to gaining the lead in the market," said Kim Hu-jeong, an analyst at Yuanta Securities. "Gains depend on the fund manager, and it is important for them to distinguish which stocks are profitable."

The Korea Exchange is aiming to ease regulations regarding active ETFs, which could attract more investors.

Stock-based active ETF managers are only allowed to make bets with 30 percent of the portfolio, with the remaining 70 percent mirroring the benchmark. Given little freedom, it has been hard to outperform the benchmark.

"We plan to discuss with the Financial Services Commission about lowering the active ETF correlation coefficient lower than 0.7," said Song Young-hun, Manager of Listing Rule & Regulation at Korea Exchange.

BY HWANG EUI-YOUNG, LEE TAE-HEE [lee.taehee2@joongang.co.kr]