Exchange-Traded Funds (ETFs) are key financial products that allow individual investors to operate their assets more efficiently and conveniently. They enable diversified investments in multiple stocks like a mutual fund, while also allowing real-time trading like stocks, often dubbed as ‘the stockization of funds.’ Due to their low fees and high transparency, this asset management method has rapidly grown worldwide in the past decade.
ETFs are designed to track a specific index. For instance, they follow stock indices like KOSPI 200, S&P 500, and NASDAQ 100. With an ETF, investors can automatically diversify their investments across dozens or hundreds of stocks comprising the index, without having to pick individual stocks. This reduces the impact of individual stock volatility on the overall return.
The most notable feature is that ETFs are listed on exchanges and can be traded just like regular stocks. While general mutual funds are traded at a fixed price once a day, ETFs can be bought and sold depending on real-time price fluctuations during trading hours, offering transparency and higher liquidity, making it easier for investors to react promptly.
The fee structure of ETFs is also appealing. While active funds typically charge over 1% in management fees, most ETFs charge only around 0.1% as their management strategy is ‘passive.’ Instead of fund managers selecting stocks to beat the market, they are designed to mechanically follow an index, resulting in lower costs for labor and research.
Since the first ETF was listed on the Korea Exchange in 2002, the market has grown rapidly. Initially dominated by simple index types, it has now diversified into specific industries, commodities, bonds, overseas assets, and thematic types. For example, there are products targeting the rise in specific fields, such as ‘U.S. Semiconductor ETF’ and ‘Battery Theme ETF.’ Commodity ETFs provide an easy gateway to gold, silver, oil, and more.
Leverage and inverse ETFs are also popular among individual investors. These products are designed to seek returns double the index’s growth rate or profit from the index’s decline. However, as their daily returns are reset, they are unsuitable for long-term investment and come with high volatility and risk.
Recently, active ETFs have also emerged. Although based on an index, they allow fund managers some discretion to adjust stocks, attempting to combine the advantages of passive strategies with the flexibility of active management. This market is rapidly expanding in both the U.S. and Korea.
ETFs also offer tax benefits. In Korea, capital gains tax is exempted, and only dividend income tax is imposed, similar to stocks. Additionally, using foreign ETFs allows easy investment in global assets, effectively diversifying asset portfolios.
The accessibility provided by ETFs makes them an essential tool for both individual and institutional asset management. They are considered the most efficient means for a long-term diversified investment strategy. However, since ETFs vary in their underlying assets, management strategies, and fees, it is important to thoroughly review the product structure before investing.
ETFs are evolving as a core tool in investment strategy, not merely being ‘cheap funds.’ Understanding and choosing the structure is crucial, just like reading and reacting to the market.