South Korea's ETF Market Surpasses 200 Trillion Won: A Retail Revolution and the Rise of Thematic Investing

South Korea's ETF market has reached a historic milestone, surpassing 200 trillion won ($143 billion) in total net assets as of June 2025—a doubling in size from just two years prior. This explosive growth is not merely a function of institutional demand but a retail-driven phenomenon, with individual investors propelling the market to unprecedented heights. As the landscape evolves, thematic innovation and tax-advantaged strategies are fueling adoption, while risks such as market saturation and regulatory scrutiny demand investor vigilance.

The Retail Investor Uprising

Retail investors have emerged as the dominant force behind this surge. Through May 2025, individual investors contributed 10.32 trillion won in net purchases, accounting for 30.3% of daily trading volume—a stark contrast to the 17% and 14% shares held by institutional and foreign investors, respectively. This shift reflects a strategic move toward ETFs' accessibility, low fees (typically 0.5%), and diversification benefits. Unlike stocks, ETFs offer exposure to broad indices or niche themes with reduced volatility, making them ideal for tax-advantaged accounts like the Individual Retirement Pension (IRP), which restricts investments to ETFs and mutual funds.

Thematic ETFs: The Performance Engine

While traditional index-tracking ETFs remain foundational, the real growth driver lies in thematic innovation. By mid-2025, over 984 ETFs were listed, with thematic products—such as defense, aerospace, and monthly dividend strategies—dominating returns. The PLUS K-Defense ETF, for instance, delivered a staggering 116% return through May 2024, outperforming the broader KOSPI index by a margin of over 100 percentage points. This success has spurred demand for sector-specific exposure, enabling investors to bet on trends like advanced manufacturing or cybersecurity without picking individual stocks.

Competitive Dynamics: A Near-Duopoly Faces Pressure

Samsung Asset Management and Mirae Asset Global Investments dominate the market, controlling 38.7% and 33.5% of assets, respectively. However, competition is intensifying: 27 firms now manage ETFs, up from just two in 2002. While this diversification fosters innovation, it also raises concerns about oversaturation. Over 100 ETFs have less than 10 billion won in assets, dubbed “zombie ETFs,” and operational missteps—such as NAV calculation errors—have sparked regulatory scrutiny. Investors must prioritize liquidity and management track records to avoid underperforming funds.

Risks on the Horizon

• Market Saturation: With 984 ETFs already listed, niche product proliferation risks diluting liquidity and returns.
• Regulatory Overreach: Errors in fund operations could prompt stricter oversight, potentially stifling innovation.
• Global Diversification Gaps: Over 90% of Korean ETF assets remain domestic, leaving portfolios vulnerable to local economic cycles.

Investment Strategy: Selectivity and Global Exposure

For investors, the path forward requires a dual focus:
1. High-Performing Thematic ETFs: Allocate to well-constructed funds tied to secular trends (e.g., defense, renewable energy) with strong liquidity and expense ratios below 0.3%.
2. Global Diversification: Pair domestic exposure with international ETFs to mitigate concentration risk. For example, pairing the PLUS K-Defense ETF with a global tech ETF (e.g., $XLK) could balance sector and regional risks.

Conclusion

South Korea's ETF boom is a testament to retail investors' growing sophistication and the power of innovation. Yet, as the market matures, success hinges on discernment: avoiding overcrowded or underfunded ETFs, prioritizing liquidity, and maintaining global diversification. With the potential for the market to reach 450 trillion won by 2029, investors who blend thematic opportunism with disciplined risk management will be best positioned to capitalize on this transformation.

Final Note: Monitor regulatory developments and liquidity metrics closely, as these could redefine the ETF landscape in the coming years.