South Korean ETN market grows fast in 2022, hitting $7.7 bn

2022.12.01 11:41:01 | 2023.04.03 14:16:02

Image of ETN market growing이미지 확대

Image of ETN market growing

Exchange-traded notes (ETNs) promising handsome profits through mostly leveraged investment schemes are growing popular in South Korea as investors seek alpha from a diverse product mix in an overall bearish market.

But market analysts warn of possible big losses from an ETN investment bubble because most of these unsecured debt securities are high return and high-risk products.

According to Korea Exchange data on Wednesday, the indicative value (IV) of all listed ETNs stood at over 10 trillion won ($7.7 billion) as of Nov. 29, up 14.42 percent from 8.77 trillion won at the start of this year. The figure surpassed the 10 trillion won mark for the first time in March and peaked at 11 trillion won in June. The number of listed ETNs also increased by 90 to 360, with the majority focusing on commodities such as highly volatile crude oil and natural gas assets, as well as stock index futures.

ETNs are similar to exchange-traded funds (ETFs). The unsecured debt securities track the performance of an underlying benchmark index or asset, but their issuance is limited to securities companies as they are less liquid than ETFs and contain holding-period risk. ETFs are issued by asset management firms in Korea. As ETNs are unsecured debt with credit risk, they can be worthless if the IV falls to zero due to market volatility or the issuer is under extreme financial stress, such as bankruptcy.

For ETFs, the minimum number of stocks for diversification is 10 or more. On the other hand, ETNs can use five or more as the underlying asset, making it easier to create more various ETN products than ETFs.

Shinhan FnGuide Chicken ETN [Image source: Shinhan Securities]이미지 확대

Shinhan FnGuide Chicken ETN [Image source: Shinhan Securities]

For example, the Mirae Asset FnGuide Busan EXPO Bonus Coupon ETN recently issued by Mirae Asset Securities will provide eligible holders with a 1.2 percent bonus coupon when Korea succeeds in hosting the Busan Expo. The underlying asset is composed of 11 companies participating in the Busan World Expo 2030 bidding committee, which includes Samsung Electronics, Hyundai Motor, Posco Holdings, SK, and LG. The Shinhan FnGuide Chicken ETN listed on Nov. 17 has the underlying asset of 10 listed companies related to chicken, one of the favorite foods for Koreans.

Experts advise, however, that investors need to be careful about ETNs as most of them are high-risk leveraged or inverse products and focus on highly volatile commodities compared to ETFs.

By Kim Geum-yi, Won Ho-sup and Minu Kim

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