The house always wins: Asset managers collect tens of billions in fees on leveraged chip ETFs
Surcharges for management, trusts, administration and more mean that asset managers will always profit from the leveraged ETF scramble, regardless of whether investors win or lose.
A graph of a single-stock leveraged ETF tied to SK hynix is seen on a phone screen with SK hynix's stock price in the background on July 15.NEWS1
Asset managers are expected to rake in tens of billions of won a year in management fees from single-stock leveraged exchange-traded funds (ETF) tied to Samsung Electronics and SK hynix, even as retail investors' losses continue to mount.
The 16 single-stock leveraged ETFs currently on the market, including two inverse products, are projected to generate about 19 billion won ($12.9 million) in annual management fee revenue, according to the financial investment industry on Wednesday. The estimate is based on a simple application of each fund's management fee rate to its Assets Under Management (AUM) on the same day.
The products had a combined AUM of 9.92 trillion won on Wednesday. Based on June 25, when their combined net assets peaked at 17.6 trillion won, annual management fee revenue would have reached an estimated 34.2 billion won. Actual revenue may vary depending on market performance and investor inflows and outflows.
Samsung Asset Management practically dominates the market, with two related products accounting for a combined 5.81 trillion won in AUM. Based on that figure, the firm alone is expected to earn about 15.6 billion won in annual management fees, or more than 82 percent of the total estimated revenue.
Unlike actively managed funds, in which portfolio managers seek to outperform the market by selecting individual stocks, single-stock leveraged ETFs are passive products designed to deliver twice the daily return of an underlying asset according to predetermined rules. Asset managers say management fees are necessary because the funds require daily rebalancing to maintain their target leverage.
Management fee rates also varied widely among products tracking the same underlying asset, with the highest fee nearly four times the lowest. Among long leveraged products, Samsung Asset Management charged the highest rate at 0.269 percent, followed by Kiwoom Asset Management at 0.2 percent. Hana Asset Management and KB Asset Management charged the lowest rate at 0.07 percent.
For inverse products, two-times ETFs linked to Samsung Electronics futures managed by Hanwha Asset Management charged 0.474 percent, the highest among related products.
Financial Supervisory Service (FSS) Gov. Lee Chan-jin speaks at a meeting in Yeouido, Yeongdeungpo District, western Seoul on July 21.FINANCIAL SUPERVISORY SERVICE
“The most important factor for leveraged ETFs is securing ample liquidity so investors can buy and sell immediately at appropriate prices whenever they want,” a Samsung Asset Management official said. “We have secured 25 Authorized Participants [AP] and 15 liquidity providers, the largest network in the industry, for our single-stock leveraged ETFs.”
Investors' costs extend beyond management fees. Total ETF fees also include trust fees, fund administration fees and fees paid to APs, which are distributed to custodian banks, fund administrators and securities firms, respectively. Additional costs such as index licensing fees, audit expenses and trading and brokerage commissions further increase investors' overall expenses.
The Financial Supervisory Service (FSS) has also raised concerns that financial firms benefit even as investors suffer mounting losses. During a meeting last month, FSS Gov. Lee Chan-jin likened securities firms and asset managers to the house in a gambling operation that takes a cut regardless of whether players win or lose.
“The players gain little, while the system that runs the game profits. I am personally very concerned about that,” Lee said.
Separate from management fees, securities firms also earn commission income from the heavy trading activity these products generate. Since single-stock leveraged ETFs are frequently traded over short periods, so commission revenue rises as trading volume increases.
The average turnover rate of single-stock inverse ETFs reached about 1,800 percent over the most recent five trading sessions. The FSS estimates that securities firms could generate as much as 10 trillion won in commission revenue from single-stock leveraged products.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
