Korean Active ETFs Delisted for Beating Benchmarks Too Much

Four active exchange-traded funds (ETFs) will be removed from the market next month. The delisting comes not because of poor management but because the funds performed far above their benchmark indices, which became the grounds for their removal.

Delisting Notice After Posting 170% Return

Four active ETFs managed by Korea Investment Management will disappear from the market between the 7th and 9th of next month, according to the financial investment industry and Yonhap News. ACE TDF2030 Active will be delisted on the 7th, while ACE Apple Value Chain Active, ACE Long-Term Asset Allocation, and ACE TDF2050 Active will be removed on the 9th.

There are two requirements for ETF delisting. The first is when total net assets fall below 5 billion won for one year after establishment. The second is when the correlation coefficient between the ETF and its benchmark index falls below the threshold for three consecutive months. The correlation coefficient standard for active ETFs is 0.7, and when returns far exceed the benchmark, this figure drops below 0.7.

This delisting falls under the latter case. This marks the first time ETFs have been delisted for excess returns over their benchmark index.

ACE Apple Value Chain Active posted a one-year return of 170.73% as of the 23rd, exceeding its benchmark index (116.79%) by 53.94 percentage points. ACE TDF Long-Term Asset Allocation Active also exceeded its benchmark by 4.96 percentage points over the same period, while ACE TDF2050 Active and ACE TDF2030 Active surpassed theirs by 1.15 percentage points and 0.62 percentage points, respectively.

Timefolio Asset Management's "TIME Global Top Pick Active" was also subject to delisting for the same reason, but avoided removal thanks to a rule that grants a grace period to ETFs listed for less than one year.

"Managed Well, Yet Faced a Backlash"... Exchange Says It's "An Investor Protection Device"

Within the industry, voices pointing out the paradox of the regulation are growing louder. An official at one asset management firm told the outlet, "An ironic situation is arising where we have to deliberately lower returns to meet the correlation coefficient standard."

Another official said that fully active management is realistically impossible under the current regulation. The official said that even in a declining market, where firms could defend positions by trimming stocks with damaged fundamentals or raising their cash weighting, they are forced to hold stocks included in the index. Some pointed out that outdated regulations are blocking the excess performance investors expect.

In response, the Korea Exchange explained that the correlation coefficient requirement is not intended to limit returns but is a minimum device to verify whether an ETF is being managed in accordance with the product characteristics it presented at the time of listing. It added that the measure is meant to prevent deviation in management and to protect investors from harm.

Over this paradoxical structure in which management performance becomes grounds for delisting, the industry and the exchange are running on parallel lines, unable to find common ground between "maximizing returns" and "maintaining product identity."