KOSDAQ Active ETFs Draw Billions, Urgent Need for Volatility Safeguards

Retail investors are pouring massive funds into KOSDAQ active exchange-traded funds. Two KOSDAQ active ETFs listed on the 10th of this month attracted more than 1.2 trillion won in retail investment in less than a week. Additional listings are queued up, including another KOSDAQ active ETF and a biotech-focused KOSDAQ active ETF set to launch on the 17th. Expectations are high that these products will serve as a catalyst to energize the relatively neglected KOSDAQ market. However, concerns are growing that lax regulations could amplify volatility in the Korean stock market, which has already experienced historic swings due to geopolitical tensions originating from the Middle East.

Unlike passive ETFs that mechanically track indices, active ETFs allow fund managers discretion to identify promising stocks and pursue returns exceeding market benchmarks. The problem is that the KOSDAQ market has far less liquidity than the KOSPI market. When large active ETF funds concentrate in or exit specific stocks, there is significant risk of heightening volatility in both individual stocks and the overall index. Combined with the "leveraged investing" trend of borrowing to chase short-term gains, this raises concerns about potential losses for retail investors. Despite recent rising interest rates, bank credit loans surged by 1.4 trillion won from the beginning of this month through the 12th.

Regulatory gaps have also been exposed, with active ETF portfolios being disclosed before listing, causing some stocks to spike in after-hours trading. Current regulations only require daily reporting and disclosure of active ETF asset compositions, with no safeguards against advance information leaks. The Financial Supervisory Service has belatedly begun examining potential market manipulation and unfair trading practices, and a thorough investigation must follow.

Financial authorities should use this opportunity to overhaul regulations and improve the system for active ETFs broadly. Beyond pre-listing information disclosure, post-listing portfolio disclosure methods also need to be updated to reflect market realities. Serious consideration should be given to introducing "delayed disclosure," which staggers portfolio releases as with general public equity funds. Authorities must recognize that revitalizing the KOSDAQ market begins not with simply expanding liquidity supply, but with establishing systems to secure investor trust and ensuring transparent management.