South Korean entertainment has risen to the top of global charts – and now an ETF provider is hoping that fame can translate into financial gains for exchange-traded fund investors beyond the Asian country.
Research suggests that thematic ETFs, on average, underperform, in part because when they launch they are already late to the party. But CT Investments, a relative newcomer to the ETF industry, thinks the Korean entertainment craze is far from over.
According to Jackie Choy, director of exchange-traded fund research for Morningstar, domestic South Korean investors are already enthusiastic buyers of narrow thematic ETFs and can access funds focused on “K-Pop” music, games, the metaverse, and even Korean cuisine. Asia.
It specifies that, of the 128 local thematic funds listed in South Korea at the end of 2021, 80 had been launched during the previous two years. These new entrants accounted for 52.5% of thematic fund assets at the end of 2021.
However, KPOP Korean Entertainment ETF, which launched on the NYSE Arca exchange last month, is a rare attempt to introduce South Korean culture to overseas investors.
CT Investments maintains close ties with the South Korean music industry. It is a wholly-owned subsidiary of Seoul-based Content Technologies, whose investments, according to the two companies’ managing director, Jangwon Lee, include a majority stake in Beyond Music’s management company. The latter is South Korea’s answer to Hipgnosis, the Blackstone-backed global music rights company that has picked up catalogs of artists ranging from Blondie to Neil Young.
Lee argues that the time has come. It highlights the international success of K-Pop groups such as BTS, which was the world’s top-selling group last year, and Blackpink. They have over 80 million subscribers on YouTube and their videos have been viewed over 26 billion times.
CT’s KPOP ETF is also investing in Studio Dragon, the entertainment company that produced Parasite which in 2020 became the first foreign language film to win Best Picture at the Oscars. It is also invested in Showbox and Bucket Studio, backers associated with squid gamewhich became the most-watched program on the Netflix streaming service when it was released last year.
“My premise is that there must be fans who don’t just want to consume [a South Korean cultural export]they also want to own it,” says Lee.
Some analysts, however, are skeptical. ” While we [in the US] have narrowly targeted U.S.-listed ETFs related to cannabis, cybersecurity, climate change, video games and even space exploration, there’s no such thing as KPOP,” says Todd Rosenbluth, Head of research at VettaFi. “It’s hard to justify investing in the strategy,” he argues, “other than to make your portfolio more fun.”
Rosenbluth also points out that investors are unlikely to know what KPOP owns. “When investors think about exposure to South Korean equities, they [usually] want the benefits of multinationals based there like Samsung Electronics or Hyundai Motor,” he suggests.
“KPOP would be a contrarian bet on the Korean stock market versus what they traditionally invest in.”
KPOP ETF invests in only 30 stocks listed on the Korea Stock Exchange. Lee says the companies tend to be more nimble than the traditional chaebol — the sprawling, family-owned industrial conglomerates, such as Samsung, that dominate in South Korea.
Lee also points to KPOP’s investment rules, which include a stipulation that companies must have a market capitalization of at least 100 billion won ($73 million).
The ETF is targeting a 70-80% weighting in the entertainment industry, split between music, movies and TV shows, as well as between 20% and 30% in the media and interactive services industry . This includes stakes in Naver (the South Korean answer to Google) and Kakao (the South Korean equivalent of mobile messaging service WhatsApp).
The index is rebalanced quarterly and the ETF has a total expense ratio of 0.75%.
Kenneth Lamont, senior fund analyst for passive strategies at Morningstar, said the decision to launch such a South Korea-themed ETF in the United States was highly unusual.
“Having extensively reviewed the global thematic ETF dataset, I can say that innovation in terms of new thematic ETFs has been largely driven and driven by the US and European markets,” he notes.
But he adds that one of the few examples of an investment trend starting outside of those markets was also a South Korean ETF.
Lamont points out that the first hydrogen economy ETF he could find was listed in South Korea. “We subsequently saw several hydrogen economy ETFs emerge in the US and Europe, as well as Brazil and Australia, which collectively hold over $1 billion in assets.”
However, supporting K-Pop groups and successful South Korean movies and streaming shows are very different propositions for investing in future power sources. And, as Choy points out, niche products are, as their name suggests, focused on very specific narrow themes and segments.
“Sometimes themes can come and go pretty quickly,” he says.