ETF trading-pattern analysis:Expecting shift in focus toward better pricing efficiency

三星证券公司 Gyun Jun


　　The Korean ETF market showed explosive quantitative growth in 2011, with a 65%jump in net assets to KRW9.9t (from KRW6t at end-2010) and surges in daily-averagetrading volume and value to 41.58m shares and KRW489.5b, respectively (up 461% and344%). Such growth stemmed from active market participation by individual investorsand an increase in number of ETF product offerings.

　　Despite severe stock-market fluctuations, ETFs performed better y-y in terms of priceefficiency—ie, less volatility in price (fewer abnormal quotations) and improvedliquidity.

　　Kospi 200-tracking ETFs saw much smaller abnormal price fluctuations in 2011, thanksto aggressive quotations from liquidity providers and active participation by investors.

　　Meanwhile, return volatility and tracking errors (vs the benchmark index) moved handin hand—eg, low volatility meant smaller tracking errors. In terms of NAV, Kospi 200-tracking ETFs were undervalued during the year, as shown by the disparate ratio, whichranged from -0.7% to +1.0%.

　　Inverse ETFs gained in popularity last year, their net asset value surging 425%, anddelivered positive annual returns thanks to market corrections. They also showed awider distribution of returns than in 2010 due to increased market volatility. Disparityratios varied widely across inverse ETFs, which remained undervalued throughout 2011because of undervalued index futures.

　　Leveraged ETFs saw their net asset value balloon 421% in 2011 to KRW1.179t, fromKRW226.1b in end-2010. There was little abnormal pricing thanks to ample liquidity,but such ETFs showed high disparity in daily returns with their Kospi 200-tracking andinverse counterparts—normal behavior as leveraged ETFs are meant to double the dailyreturns of a benchmark index. Although each leveraged ETF differed widely, the degreeof disparity declined last year on expansion in number of ETF constituents.

　　Looking ahead following last year’s explosive quantitative growth in the ETF market, weexpect a shift in focus toward improving pricing efficiency. For ETFs showing disparateratiogaps with same-category peers, efforts will likely be made to increase liquidity andimprove pricing efficiency—eg, by arbitrage trading within the same category.