gettyimagesbank

Financial authorities are urged to implement measures to curb excessive competition and safeguard investors in the rapidly expanding exchange-traded fund (ETF) market.

An ETF is a collection of securities that can be bought and sold like individual stocks. According to the Korea Exchange (KRX), the ETF market reached a milestone in June this year, with total net assets surpassing 150 trillion won ($112.14 billion) for the first time. This follows the market exceeding the 100 trillion won mark in June 2023.

Data from Korea Securities Depository (KSD) showed that the number of listed ETFs on the stock market in Seoul has been on the rise — up from 533 in 2022 to 883 as of late August this year. The KSD believes it is "only a matter of time" before the number exceeds 900.

Under these circumstances, separate data from the KSD revealed that, as of late August, a total of 72 ETFs had net assets of less than 5 billion won. This represents a 46.9 percent increase compared to the end of December last year.

The KRX monitors ETFs every three months and puts those with net assets lower than 5 billion won on the watch list.

If an ETF remains on the list for 12 consecutive months, it may be subject to removal from the stock market.

“The data suggests nearly 1 out of 10 listed ETFs faces a possible risk of removal,” Citizens' Coalition for Economic Justice (CCEJ), a Seoul-based civic advocacy, said.

“The case is getting serious as the number of ETFs on the watch list is increasing, but we don't see any action taken by the financial regulators to keep the number down and protect investors,” it added.

These so-called “zombie ETFs” can adversely affect investors, too, the CCEJ noted.

Zombie ETFs are those with net assets below 5 billion won and a daily average trading volume of fewer than 1,000 shares over a three-month period.

The number of such ETFs totaled 32 as of late August.

"Keeping such ETFs on the stock market only harms investors," said Jung Eui-jung, head of the Korean Stockholders' Alliance.

He attributed the intense competition among asset management companies to the presence of "zombie ETFs."

Jung pointed out that leading asset management firms tend to focus on ETFs to reap profits, which in turn, prompt smaller peers to feature similar products hastily.

Speaking on condition of anonymity, a public relations representative at an asset management company noted that it will be challenging to "simply delist underperforming ETFs due to potential backlash from investors in these products."

He added, "In other words, it will be tricky for the financial authorities to overhaul regulations on ETFs."