Synthetic ETFs vs Conventional ETFs


I wonder if you guys have spent your winter vacation as you have planned in the first place. Most of the universities in Korea open up the semester next week. I, myself have to get back to school! Whether you have spent your vacation satisfactorily or not, let’s cheer up and start up fresh! Today’s topic is on ETFs.

I wonder if you guys have heard of ETFs. An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are the most popular type of exchange-traded product. Overall, a conventional ETF is mainly operated by including stock and debentures.

But the ETF we are trying to figure out today isn’t the Conventional ETF we can see around commonly. The ETF I am trying to introduce is called a Synthetic ETF. Financial Services Commission has officially announced on 26 of February, that it has given its approval on the proposal of revised plan of Securities Listing Regulations suggested by KRX (Korea Exchange). So what is a synthetic ETF? A synthetic ETF does have major characteristics of conventional ETF but the things we need to focus on is that a synthetic ETF can utilize outside swap transaction to duplicate and follow index. In case of Korea, a synthetic ETF might be a bit unfamiliar but in Hong Kong and European ETF markets, a synthetic ETF is very popular as market gravity show rate of 38% and 35%.

So let us find out what are the major changes of revised plan of Securities Listing Regulations mentioned above. The gist of this proposal is supplement of administration system for introducing a synthetic ETF. As a synthetic ETF is operated mainly by swap transaction, in order to minimize risk of the other party to a transaction, FSC along with KRX has introduced a regulatory system that administers entry, management, liquidation and disclosure. But there are small scaled ETFs that are not being very welcomed in the financial markets. There seems to be a broad scaled restructuring (adjustments) on these small sized ETFs as synthetic ETFs are to be adopted soon. According to an interview, a person concerned has said that once a synthetic ETF gets adopted, there would be promotion of diverse and fresh ETF products to be released. FSC has officially announced that it would revise the related legislations before listing synthetic ETF on stock exchange market.

By Hyok Hee Kwon (Tony)


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