Four active exchange-traded funds (ETFs) managed by Korea Investment Trust are facing delisting due to failing to meet the required correlation coefficient, marking the first such case in South Korea. While some argue that delisting high-yield ETFs is excessive, industry insiders emphasize that the core issue lies not in returns but in the asset manager's failure to maintain the correlation coefficient with the benchmark index over time, pointing to a breakdown in internal controls.
According to the financial investment industry on July 3, the ETFs in question—ACE TDF2030 Active Qualified, ACE TDF2050 Active Qualified, ACE TDF Long-Term Asset Allocation Active, and ACE Apple Value Chain Active—are undergoing delisting procedures due to their correlation coefficients falling below the required threshold. This is the first instance of an ETF being delisted for this reason in the country.
Under Article 116 of the KOSDAQ listing regulations, active ETFs must maintain a correlation coefficient of at least 0.7 with their benchmark index. If the coefficient remains below 0.7 for more than three months, the ETF is subject to delisting. The ACE TDF2030 Active Qualified has been below 0.7 since April 2, while the other three ETFs have been below this threshold since April 6.
The total net asset value of the ETFs set for delisting is 112.2 billion won, comprising 15.1 billion won for ACE TDF2030 Active Qualified, 51 billion won for ACE TDF2050 Active Qualified, 12.6 billion won for ACE TDF Long-Term Asset Allocation Active, and 33.5 billion won for ACE Apple Value Chain Active. The ACE TDF2030 Active Qualified is scheduled to be delisted on July 7, while the other three will be delisted on July 9, with trading suspended one day prior to each delisting.
Some have argued that delisting products that have outperformed their benchmark is overly strict regulation. However, the asset management industry finds such claims difficult to accept.
One asset management official stated, "Returns are a retrospective issue. Active ETFs are designed to seek excess returns based on the benchmark index specified in their prospectus." He added, "If deviations from operational principles are tolerated simply because performance is good, it becomes difficult to hold managers accountable when losses occur due to operations that differ from the prospectus."
Another official remarked, "Generating excess returns while adhering to regulations is the hallmark of a competent asset manager. The managers failed to adequately manage the divergence from the benchmark index, and the internal monitoring control systems did not function properly."
Indeed, the ETFs facing delisting have been criticized for operating in a direction contrary to their benchmark index. The ACE TDF2030 Active Qualified disregarded its glide path based on withdrawal timing, reducing its bond allocation while continuously increasing its domestic stock allocation for over four months. Similarly, the ACE Apple Value Chain Active saw its investment in Apple value chain-related assets drop significantly below the levels outlined in its original strategy during actual operations.
The industry also points out that this issue is not merely a result of short-term market volatility. The correlation coefficient is calculated using data from the past year, making it unlikely for a brief market fluctuation to meet the delisting criteria. The announcement of the coefficient falling below the required level indicates that the divergence from the benchmark has accumulated over a long period, and the criteria were not met even after three months.
One industry insider noted, "When a correlation coefficient falls below the required level, asset managers are obligated to disclose this daily, making it hard to claim ignorance of the situation. Ultimately, the inability to restore the correlation coefficient to normal levels over several months led to the delisting."
Korea Investment Trust has stated that the correlation coefficient decreased during its tactical asset allocation process. The company explained that in the face of increased volatility in domestic and international markets, it adjusted its portfolio to seek excess returns compared to the benchmark, which resulted in some holdings performing differently from the benchmark and causing the correlation coefficient to drop below 0.7.
A representative from Korea Investment Trust said, "We have implemented corrective measures, such as adjusting the portfolio to focus on benchmark constituents and reducing the weight of non-benchmark assets to restore the correlation coefficient. However, the extreme market volatility made it difficult to recover the coefficient to 0.7."
* This article has been translated by AI.
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