South Korea's ETF Boom: Navigating Thematic Opportunities and Risks in a Retail-Driven Market

The South Korean ETF market has entered a new era, surpassing KRW200 trillion in assets under management (AUM) in mid-2024—a milestone fueled by retail investor enthusiasm, policy-driven thematic trends, and the rise of niche ETFs. Yet, as this market matures, strategic investors must navigate both opportunities and pitfalls. Below, we dissect the drivers of growth, assess the risks of overhyped themes, and outline a disciplined approach to capitalizing on this dynamic ecosystem.

The Catalysts: Retail Power and Policy Push

South Korea's ETF boom is a retail revolution. Individual investors, dubbed the “Ant Army” for their collective impact, now account for over 30% of ETF trading volume, up from 20% in 2020. This shift is underpinned by tax incentives for retirement accounts (IRPs) and pension savings, which favor ETFs over individual stocks. Meanwhile, government policies have amplified demand for defense/aerospace and tech ETFs, aligning with national priorities like military modernization and semiconductor dominance.

The PLUS K-Defense ETF (KODEX 200) exemplifies this synergy. Focused on companies like Samsung Heavy Industries and Hanwha Systems, it surged 116% year-to-date in 2024 amid heightened geopolitical tensions. Similarly, the TIGER K-Semiconductor ETF (152020) gained 45% in 2023, reflecting global chip demand. These gains have drawn retail investors en masse, even as broader market indices like the KOSPI (KS11) stagnated.

The Risks: Saturation and “Zombie” Funds

Yet, the rapid proliferation of thematic ETFs has created structural risks. Over 989 ETFs now trade in Korea, with 20% holding less than KRW50 billion—a sign of “zombie funds” clinging to listings despite minimal investor interest. Thematic saturation is stark: 15 defense-focused ETFs compete for assets, while sectors like K-Pop entertainment (e.g., the JAKOTA K-Pop ETF) have struggled, with many underperforming or collapsing entirely.

The Value-Up Index initiative, launched in 2024 to reward firms with strong shareholder returns, highlights another challenge. While it aims to redirect capital to quality companies, its success hinges on avoiding over-rotation into overvalued stocks. For instance, the TIGER Korea Value-Up ETF (157750) has already seen 20% inflows since its launch, raising concerns about frothy pricing in selected names.

Strategic Recommendations: Balance Thematic Exposure with Pragmatism

1. Prioritize Broad-Market ETFs for Core Exposure
   The iShares MSCI Korea ETF (EWY) and KODEX 200 ETF (122830) offer diversified access to the market while minimizing theme-specific risks. Their low expense ratios (0.49% and 0.15%, respectively) make them cost-effective for long-term holdings.

2. Target Themes with Structural Tailwinds
   Defense and semiconductor ETFs remain compelling due to policy backing and global demand. However, avoid overly niche products (e.g., single-conglomerate ETFs) and instead focus on broad sector funds like the TIGER K-Semiconductor ETF (152020).

3. Avoid “Zombie” Funds and Overhyped Themes
   Steer clear of ETFs with less than KRW50 billion in AUM or those tracking saturated themes (e.g., K-Pop or cryptocurrency). These often incur high fees and liquidity risks.

4. Monitor ESG and Active Management Innovations
   The KB STAR ESG ETF (068080) and Mirae Asset Active Korea ETF (057950) exemplify the shift toward sustainability and active strategies. Their ESG-integrated portfolios and lower carbon footprints align with global investor preferences.

Conclusion

South Korea's ETF market is a testament to retail power and policy ambition, but its future hinges on avoiding the traps of over-specialization. Investors should embrace broad-based, low-cost ETFs for core exposure while selectively engaging in themes with structural growth—all while vigilantly avoiding the “zombie” funds that clutter the landscape. As the market matures, discipline and diversification will be the keys to sustained success.

Final Note: Always assess liquidity, fees, and thematic relevance before investing. For thematic ETFs, consider a maximum allocation of 10-15% of a portfolio to balance risk and reward.