These days, Exchange Traded Funds (ETFs) are heating up the Korean financial market. The ETF market has been steadily growing, and this year, it even surpassed 100 trillion won in total assets under management. This is just 21 years after it was introduced in Korea. What is it about ETFs that made them grow so fast? Let's explore its concept and reasons.

What is ETF?

ETF stands for "Exchange Traded Fund," and it is a type of investment product similar to stocks. It is a result of combining the advantages of funds and stocks. ETFs possess the stability of funds, which distribute money to various companies, as well as the liquidity of stocks. Therefore, ETFs are attractive products because they can be traded in real-time on the stock exchange, similar to stocks, while simultaneously enjoying the stability of funds.

What are the advantages of ETFs?

● Easy investment: Invest in multiple assets at once without having to select individual securities

● Low cost: Lower management fees compared to regular funds

● Transparency: The composition and weighting of index components are disclosed transparently

● Diverse investment strategies: Various ETFs that track diverse indices are available

● High liquidity: Can be bought and sold in real-time like stocks

One of the biggest advantages of ETFs is their low management fees. Compared to regular funds, ETF management fees are relatively inexpensive. This is because most ETFs track specific indices, resulting in lower costs for fund managers. Additionally, ETFs are convenient because you can quickly recover your funds even after selling them. Just like stocks.

However, while relatively stable, they tend to have lower returns and may incur losses if the underlying index declines. Similar to stocks, they can also be delisted if they fail to meet the listing requirements...

Various types of ETFs

There are various types of ETFs, and each is designed for different investment strategies and purposes. Let's take a closer look.

● Domestic equity ETFs: Track domestic indices like KOSPI and KOSDAQ

● Overseas equity ETFs: Track overseas indices like S&P 500 and Nasdaq

● Bond ETFs: Track bonds, including government bonds and corporate bonds

● Commodity ETFs: Track commodities like gold and oil

1. Index (Passive) ETFs

Index ETFs are products that follow a specific index. For example, there are ETFs that track indices like KOSPI 200 or S&P 500. These ETFs are composed of securities included in the index, reflecting the weighting according to the index. Profits or losses are generated proportionally to the volatility of the specific index, providing investors with stable and transparent investments.

2. Active ETFs

Active ETFs are products where fund managers analyze market conditions, select securities, and manage them. They aim to maximize profits by responding to rapid market changes. The portfolio is composed based on the professional analysis and judgment of fund managers, and their return and stability largely depend on the fund manager's abilities.

3. Leverage ETFs

"Leverage" means a lever. Leverage ETFs are products that amplify the volatility of the underlying index. They carry a higher risk than regular ETFs and may result in greater profits or losses depending on the index's fluctuations. For instance, a 2x leverage ETF has a return or loss rate that is twice the original index's rate. Therefore, they are suitable for short-term investments or when the direction of the index can be predicted accurately.

4. Inverse ETFs

"Inverse" means the opposite. Inverse ETFs move in the opposite direction of the index they track. They rise when the index falls and fall when the index rises. They are used when investors anticipate a decline in a specific index. However, if held for a long period, they can lead to losses due to negative compounding effects and rollover costs like leverage, making them suitable for short-term investments.

How to invest in ETFs?

Investing in ETFs is similar to investing in stocks. You can easily trade through a brokerage account after opening an account. As the domestic ETF market diversifies, it provides investors with various options.

Things to consider when investing in ETFs

● Index to track: Select an index that aligns with your investment goals and risk tolerance

● Management fees: Compare management fees as they vary for different ETFs

● Trading volume: Choose ETFs with high liquidity

● Risk: Similar to all investment products, there is a potential for losses

Investing in ETFs is a great way to invest in diverse assets easily and affordably. However, you should research thoroughly before investing and make a careful selection considering your investment goals, risk tolerance, and investment duration.