Exchange-traded fund (ETF) protections designed to curb a flood of look-alike products are effectively not working, with usage either extremely limited or nonexistent for years, according to the financial investment industry. Critics say the lack of effective safeguards has helped fuel the spread of so-called “copycat” products in the ETF market. <Related article, Page 4>
As of Tuesday, South Korea operates three index and product protection programs, but their use is virtually nil, industry officials said. The Korea Exchange’s “ETP New Product Protection Program” and the Korea Financial Investment Association’s “exclusive right to use a new product” have not been applied even once since 2020. Both are intended to give a financial investment firm that develops an innovative new product the right to sell it exclusively for a set period.
Applications for the Korea Exchange program stopped after the “Samsung KRX Gold Spot ETN,” listed in November 2019. The association’s exclusive-use right has not been applied since October 2019, when Mirae Asset Daewoo (now Mirae Asset Securities) was granted five months of exclusivity for a “structured range equity-linked bond (ELB).” The Korea Exchange’s “index priority use right” (formerly an exclusive-use right) is used more often, but the industry says its impact is limited. The program allows exclusive use for three or six months based on factors such as index differentiation, but once the period ends there is no way to prevent similar indexes from entering the market.
With multiple safeguards operating in name only, the ETF market’s copycat problem is worsening. South Korea now has 1,099 ETF products with total net assets of 431 trillion won. But products tracking the same index or using similar strategies continue to proliferate, repeatedly driving overheated competition. In many cases, an ETF is treated as distinct even if it changes only a small part of its portfolio holdings or weights.
Operators of the programs say it has become harder to judge the “originality” required for protection. A Korea Exchange official said theme-based ETFs are often prepared by multiple asset managers around the same time to reflect investor demand and market issues, adding that it is difficult to find a clear reason to prevent only one firm from offering a given theme product.
Asset managers, however, argue the structure ultimately favors large firms. Even if a small or midsize manager opens a niche with a distinctive ETF, a bigger competitor can launch a similar product and dominate using greater financial resources and distribution networks. “When smaller firms target a niche and launch a product, the pattern repeats: once it looks promising, a large firm follows and pushes it with scale,” an asset management industry official said.
* This article has been translated by AI.
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