An image related to active exchange-traded funds. [Getty Images Bank]
An image related to active exchange-traded funds. [Getty Images Bank]

Four active exchange-traded funds have fallen short of the correlation coefficient threshold required to maintain their listings. With five products already delisted this year for the same reason, concerns are growing over further removals. Although financial authorities said early this year they would pursue regulatory reform, efforts to ease the correlation coefficient requirement — under discussion since 2020 — have made no progress in six years. The asset management industry says the current rules are constraining the operational autonomy of active ETFs.

According to Korea Exchange on Thursday, four active ETFs disclosed Wednesday that they had failed to meet the correlation coefficient standard. The products are NH Amundi Asset Management's HANARO Global Physical AI Active and HANARO US S&P500 Active, Timefolio Asset Management's TIME Global Top Pick Active, and Asset Plus Asset Management's Asset Plus China Top Company Focus 10 Active. Their correlation coefficients as of Tuesday were 0.69, 0.64, 0.64 and 0.69, respectively. The combined net asset value of the four products as of Wednesday stood at 132.8 billion won ($100 million).

The concern is that even funds with strong returns can face delisting if their correlation coefficient falls too low. HANARO Global Physical AI Active has posted a return of 127.19 percent since inception as of Wednesday, outpacing its benchmark index by 91.86 percentage points. Yet the fund has been below the correlation coefficient threshold since July 31, and if it fails to recover by Oct. 30, trading will be suspended Nov. 3 and the fund will be delisted Nov. 4.

The correlation coefficient measures how closely an ETF's returns move in line with its benchmark index. Domestic active ETFs are free to adjust their holdings and weightings, but they must maintain a correlation coefficient of at least 0.7 — meaning the fund's returns must broadly move in the same direction as the benchmark, rising when it rises and falling when it falls. Once a fund has been listed for more than a year, its correlation coefficient is assessed based on the preceding 12 months of returns. A reading below 0.7 for three consecutive months or more triggers delisting eligibility.

This year marks the first time ETFs have been delisted for failing the correlation coefficient requirement. In July, four products managed by Korea Investment Trust Management — ACE TDF2030 Active Qualified, ACE TDF2050 Active Qualified, ACE Long-Term Asset Allocation Active and ACE Apple Value Chain Active — were delisted. In August, Timefolio Asset Management's TIME US Dividend Dow Jones Active was removed for the same reason.

Kim Jae-chil, a senior research fellow at the Korea Capital Market Institute, said maintaining a correlation coefficient with a benchmark index is difficult for actively managed equity ETFs, and that the requirement places significant constraints on strategy formulation and individual stock weighting. "In most countries, active ETFs do not track the direction of a specific index," he said. "In principle, it would be desirable to abolish the obligation for domestic active ETFs to maintain a correlation coefficient with a benchmark index."

Discussions on easing the correlation coefficient requirement have been ongoing since 2020, when Korea Exchange said it would consider lowering the threshold, delaying the disclosure timing of portfolio composition files, or exploring non-disclosure options depending on market conditions. The Financial Services Commission also announced in January that it would pursue amendments to the Capital Markets Act to introduce fully active ETFs with no index-tracking requirement, and that it would support the National Assembly in introducing relevant legislation in the first half of the year.

The FSC's failure to follow through on its reform announcement drew criticism at the National Assembly. At the Financial Services Committee's national audit on Oct. 8, Democratic Party of Korea lawmaker Han Min-su said the FSC had not held a single related meeting since its announcement at the start of the year and urged the commission to move forward with deregulation. Han also said Korea Exchange had expressed the view that the correlation coefficient threshold should be lowered from the current 0.7 to 0.5. FSC Chairman Lee Eok-won said he agreed on the need to introduce fully active ETFs but cited the need for legislative amendments and investor protection considerations.

Industry officials say that active ETF regulatory reform took a back seat in the first half of the year as the introduction of single-stock leveraged ETFs emerged as the dominant policy issue. They add that a string of correlation-coefficient-related delistings in the second half has placed growing pressure on fund managers running their investment strategies.

One industry official said he understood why financial authorities had tightened investor protections in the wake of incidents such as the Hong Kong ELS crisis and the Lime Fund scandal. "Cases where the benchmark index rises but the ETF underperforms also need to be taken into account," the official said. "That said, it is disappointing that regulatory reform has not advanced even after the FSC announced its intention to introduce fully active ETFs earlier this year."


hajun825@heraldcorp.com