The size of the domestic market for exchange-traded securities (ETNs), which was classified as a derivative product unfamiliar to investors, exceeded 10 trillion won for the first time. It has been 8 years since it was first released in November 2014. Experts anticipate that the ETN market, which is showing a steep growth rate, will expand more than the exchange-traded fund (ETF), which has exceeded the threshold of 10 trillion won within 10 years of its introduction.
Illustration = Reporter Choo Deok-young
According to the Korea Exchange on the 30th, the total index value of ETN as of the previous day’s closing price was 10,289.4 billion won. The index value is the real value of ETN, which is similar to the market capitalization of stocks. As the company has grown in size, the number of ETN listed stocks (273) has also surged more than 20 times in eight years.
ETN is known as the ‘cousin’ of ETFs, which have recently become a popular investment vehicle. Both of them have in common that they track the underlying index, make profits, and be listed on the exchange, allowing investors to trade directly. However, unlike ETFs that directly contain and manage assets in the underlying index, such as stocks, ETNs are products that make a contract between financial companies and bring profits according to the fluctuation rate of the underlying index. It is also referred to as ‘a securities company’s ETF’.
The reason that ETN, which had not seen the light of day due to the power of the ETF market, which has grown to the 70 trillion won level, has grown to the 10 trillion won market is because it was targeting a niche in the ETF market. The financial authorities have mandated that only ETFs be used exclusively for indexes representing the market, such as the KOSPI 200, by 2020. ETN has continued to grow mainly on leveraged and inverse products centered on raw materials such as copper, zinc, silver, and nickel. As raw material prices soared due to the recent crisis in Ukraine, ETN trading volume also increased significantly. ETFs must have at least 10 constituent stocks, but ETNs can consist of even five.
It is predicted that ETFs and ETNs will continue the passion for passive investment by competitively discovering new products. Passive investing refers to an investment strategy that tracks the underlying index and produces profits. Kim Yeon-chu, CEO of Mirae Asset Securities Derivatives Division, said, “If ETFs that mainly track representative indexes are a steady seller, ETNs are a themed product that can quickly respond to investor demand.”
Crude oil ETN returns 99% this year… ‘Battle ants’ enter the war one after another as raw materials stir
Overseas raw material ETN price 133.4%↑… 70% are raw materials, leverage, inverse
In 2020, exchange-traded securities (ETNs) faced a cold season. This is because crude oil ETN investors suffered massive losses in the aftermath of the unprecedented ‘negative oil price’. As volatility increases, crude oil ETNs are in danger of being delisted one after another. However, the commotion over crude oil ETN served as an opportunity to imprint the name of ETN as a ‘commodity investment destination’ to investors. This is the background for the recent fluctuations in raw material prices due to the Ukraine crisis, and money flowing into ETN.
○ As raw materials surge, ETN transaction amount ‘wormwood’
According to the Korea Exchange on the 30th, the average daily trading value of ETN in last month was 61.34 billion won, up 36% from the average of last year. Overseas raw material ETN transaction value surged 133.4% from the previous month, which had the biggest impact. As the ETN yield of some raw materials such as crude oil soared and investment demand surged, the ETN market grew to the 10 trillion won level due to additional issuance.
Jeon Gyun, a researcher at Samsung Securities, said, “The recent issuance of ETN as demand for raw material investment has surged seems to have had an impact on the growth of the ETN market as a whole.”
ETN with the highest yield this year was ‘Samsung Leveraged WTI Crude Oil Futures’, which surged 98.67% during this period. Following this, the ‘Mirae Asset Leveraged Crude Oil Futures Mixed ETF (H)’ and ‘Shinhan Leveraged WTI Crude Oil Futures ETN (H)’ have since the beginning of the year, yielding 97.00% and 96.11%, respectively.
Exchange-traded fund (ETF) investment also contributed to the growth of the ETN market. ETFs and ETNs are substitutes and complements. ETN, a latecomer, aimed at a niche market centered on raw materials and leverage and inverse. The fact that the financial authorities restricted representative indexes such as the KOSPI 200 to ETF shares at the time of the introduction of ETN is also the background for ETN’s focus on commodity products.
○Weak dispersion rules are both advantages and disadvantages
As for the theme of ‘hot’ ETFs that were first launched in Korea last year, such as Metaverse, ETN is one step ahead. Shinhan Financial Investment launched Metaverse ETN for the first time in Korea in early September last year. The domestic Metaverse ETF was launched at the end of the same month. An industry official said, “Unlike ETFs designed by asset management companies, ETNs tend to capture customers’ investment demands more quickly because they are made by securities companies that sell them.”
The fact that product composition-related regulations are more flexible than ETFs is both an advantage and a disadvantage. For example, in ETN, the minimum variance rule is 5 stocks. When composing only stocks traded in overseas securities markets, only three stocks are allowed. This is the reason why we can quickly introduce hot theme products. ETFs must be diversified in at least 10 stocks. In other words, it has a relatively low degree of diversification compared to ETFs, which means that investment risk is greater.
Of course, ETNs aren’t the only ones with high-risk products. The two-selling ETN, a ‘mega-hit product’ first introduced by Korea Investment & Securities in 2017, is a product specialized in making profits when the KOSPI is in the boxed range. It seeks profit through the option premium by simultaneously selling both call and put options on the option expiration day each month.
○ Points to note when investing in ETN
Unlike ETFs, ETNs have maturities of up to 20 years. As it is a product made through a contract between financial companies rather than directly containing and managing the assets in the representative index, it can become a piece of paper in the worst case of bankruptcy of the securities company, the issuer. In fact, when Lehman Brothers went bankrupt in 2008, the ETN issued by the company was also delisted. Investors ran out of money.
The volatility of the ETN market is high as it mainly focuses on commodities, leverage, and inverse products. Whenever raw material prices fluctuate, the financial authorities issued an investment warning when ‘fire ants’ flocked to the ETN. Daishin Securities’ ‘gobbus (two times)’ nickel ETN was delisted as the underlying index value fell to 0 due to a surge in nickel futures prices this month.
The industry forecasts the continued growth of the ETN market. The number of securities companies entering the ETN market is also increasing from six in 2014 to nine now. “ETN has been aggressively discovering various products to overcome the weakness of being a latecomer compared to ETFs,” said Kim Yeon-chu, CEO of Mirae Asset Securities’ Derivatives Division.
Reporter Gu Eun-seo koo@hankyung.com
