🚨 ETF Market Fee War and Changes in Asset Management Industry Landscape
Today Korean Economic News | 2025.02.08
📌 "Must Be #1 Even If Not Profitable"… ETF Market Fee War Intensifies
💬 As the domestic exchange-traded fund (ETF) market surpasses 180 trillion won, Samsung Asset Management and Mirae Asset Management are engaged in extreme fee competition to expand market share. While this benefits investors, there are concerns that it may make market entry difficult for latecomers.
1️⃣ Easy to Understand
In the domestic ETF market, Samsung Asset Management and Mirae Asset Management are engaged in intense fee competition. I'll explain what this competition, which has prompted the saying "must be number one even if not profitable," means and how it affects investors and the market.
What is an ETF? Simply put, it's an investment product that tracks a specific index (e.g., KOSPI 200) or theme (e.g., semiconductors, artificial intelligence) and can be bought and sold like stocks. For example, when you purchase a KOSPI 200 ETF, you're indirectly investing in the 200 companies included in the KOSPI 200 index. Due to this convenience, ETFs have become a very popular investment vehicle for individual investors.
Asset management companies charge investors a "management fee" for creating and managing ETFs. For example, if you invest 10 million won in an ETF with an annual management fee of 0.1%, you're paying 10,000 won in fees per year. Currently, Samsung Asset Management and Mirae Asset Management are competing by drastically lowering these fees. Some products have fees as low as 0.001% (10 won annually on a 1 million won investment).
Why is such extreme fee competition occurring? This is because "economies of scale" have become important as the ETF market rapidly grows. Simply put, larger asset size is advantageous in the ETF market. Larger scale attracts more investors, which in turn increases scale, creating a virtuous cycle. Additionally, since ETFs are long-term investment products, securing market share now can generate profits for a long time to come.
This fee competition is clearly good news for investors as they can invest at lower costs. However, there are some concerns from an industry-wide perspective. Extreme price competition can make it difficult for latecomers to enter the market, potentially strengthening the monopolistic structure of a few large asset management companies. Also, if management companies pursue scale over profitability, there's a possibility that investment in product innovation or service quality improvement may decrease in the long term.
Thus, the ETF market's fee war, where companies "must be number one even if not profitable," can be seen as an important competition that determines the future structure of the asset management industry, beyond simple price competition. As an investor, it's important to understand these changes and make investment decisions by considering various factors comprehensively, including not only fees but also the expertise of the management company, the ETF's tracking error, and trading liquidity.
2️⃣ Economic Terms
📕 ETF (Exchange Traded Fund)
ETF (Exchange Traded Fund) is an investment product that tracks a specific index and is traded on exchanges like stocks.
- It constitutes a portfolio across various asset classes including stocks, bonds, and commodities, and is a representative means of passive investment.
- It is popular among individual and institutional investors due to advantages such as diversification, low costs, high liquidity, and tax efficiency.
📕 Management Fee
Fees are costs charged to investors by management companies for managing ETFs.
- Expressed as an annual percentage of the investment amount, they directly affect investor returns.
- Various fee levels are applied depending on the ETF type, management strategy, and underlying assets.
📕 Market Share
Market share refers to the percentage a specific company occupies in the overall market.
- In the asset management industry, market share is measured based on assets under management (AUM).
- High market share provides advantages such as brand recognition, economies of scale, and market power.
📕 Competitive Strategy
Competitive strategy is the strategic approach adopted by companies to secure competitive advantage in the market.
- There are various strategies including cost leadership, differentiation, and focus, with effective strategies varying by industry characteristics.
- In the ETF market, aggressive price competition frequently occurs as economies of scale and first-mover effects are important.
3️⃣ Principles and Economic Outlook
💡 Growth and Competitive Structure of the Domestic ETF Market
The domestic ETF market has shown rapid growth, surpassing 180 trillion won, and the competitive landscape is also changing amidst this rapid growth.
First, the explosive growth of the ETF market is the result of several factors working together. The appeal of ETFs, with their diversification and cost efficiency, has been highlighted in an environment of increased financial market volatility and low interest rates. Particularly with the 'direct investment' trend centered around the MZ generation, ETFs have rapidly emerged as an alternative to equity funds. The increased participation of individual investors in the stock market after COVID-19 in 2020 also contributed to the expansion of the ETF market. The diversification of thematic ETFs, absorbing demand for investment in specific industries or trends, is also cited as a growth factor. This trend is expected to continue, with the ETF market size projected to exceed 250 trillion won by 2026.
Second, the domestic ETF market has a clear duopoly between Samsung Asset Management and Mirae Asset Management. These two companies account for about 75% of the domestic ETF market, and competition for market share has intensified recently. Samsung Asset Management has maintained the top position for a long time, but Mirae Asset Management is narrowing the gap with aggressive new product launches and marketing. Mid-sized management companies such as KB Asset Management, Korea Investment Trust Management, and NH-Amundi Asset Management are targeting niche markets with differentiated thematic ETFs, but the gap with the two major companies remains large. Recently, new entrants such as Kyobo AXA Asset Management and Meritz Asset Management have increased, but they face high entry barriers.
Third, diversification of ETF types is also progressing along with market expansion. Besides traditional index ETFs (KOSPI 200, NASDAQ, etc.), sector ETFs (semiconductor, biotech, etc.), thematic ETFs (ESG, metaverse, AI, etc.), and strategic ETFs (dividend, low volatility, etc.) have significantly increased. Product diversity expanded further with the introduction of active ETFs after 2023, and the proportion of global ETFs investing in overseas assets is steadily increasing. There is a trend of expanding investment areas from concentration in domestic equity ETFs to bonds, commodities, and alternative investments. Recently, innovative products such as multi-asset ETFs combining different assets or goal-oriented solution ETFs have also emerged.
Fourth, the composition of ETF investors is also changing. Initially centered on institutional investors, the proportion of individual investors has greatly increased recently. With young investors in their 20s and 30s actively participating in the ETF market, products and services targeting them are also expanding. Institutional investors such as pension funds and insurance companies are also increasing their use of ETFs for asset allocation efficiency, and the trend of using ETFs as a core investment vehicle in asset management services such as robo-advisors and fund wraps is strengthening. Foreign investors are also increasing their investment proportion through ETFs with high accessibility to the Korean market.
This growth and change in the domestic ETF market follows the development trajectory of the global ETF market while reflecting the specificity of the Korean market. In particular, intense competition between the two major management companies increases market dynamism while also raising structural challenges such as deepening monopolization.
💡 Background and Impact of the Fee War
It is necessary to examine the background of extreme fee competition in the ETF market and its impact on the market from multiple angles.
First, the fundamental cause of the fee war is the 'economies of scale' characteristic of the ETF industry. ETFs have a structure where profitability improves as the operating scale increases, distributing fixed costs. Also, in the ETF market, liquidity and trading volume become important competitiveness factors, which work to the advantage of large ETFs. Larger ETFs have narrower trading spreads, reducing investor costs, which in turn promotes fund inflows, creating a virtuous cycle. Due to these structural characteristics, management companies have prioritized market share expansion over short-term profits. Market share is recognized as a key success factor in the ETF business, to the extent that the phrase "must be number one even if not profitable" has emerged.
Second, looking at the specific aspects of fee competition reveals its extremity. Just two years ago, the management fee for a typical equity ETF was around 0.2-0.3% per year, but now many products have fees below 0.05%. In particular, major index ETFs (KOSPI 200, S&P 500, etc.) considered core markets by the two major management companies have fees that have dropped to as low as 0.001%. This is virtually close to 'free management.' Many newly launched ETFs are entering the market with lower fees than competing products. Some products are even running promotions with 0% fees for a certain period. Such extreme fee reductions are difficult to find even in the global ETF market.
Third, the impact of the fee war on investors and the market is complex. From an investor's perspective, there is clearly a benefit in reduced cost burden. Especially for long-term investors, low fees can accumulate through the compounding effect to create a significant difference in returns. Also, fee competition provides an opportunity for management companies to increase efficiency and reduce unnecessary costs. However, negative aspects also exist. Extreme price competition can make market entry difficult for late entrants, potentially increasing market concentration. There's also a possibility that investment in research and development, product innovation, and investor education may decrease due to profitability deterioration. Also, some niche market or innovative strategy-based ETFs may disappear from the market as they find it difficult to achieve economies of scale.
Fourth, the importance of differentiation factors other than fees is increasing. In a situation where fees have become extremely low, management companies are trying to secure competitive advantages in other ways. Differentiation in operational capabilities such as minimizing tracking error, providing liquidity, and improving tax efficiency is becoming important. Competition in additional services such as investor education, providing research, and strengthening digital platforms is also intensifying. In particular, the ability to develop differentiated products such as thematic and active ETFs is emerging as a core competitiveness. Eventually, the fee war is likely to lead to an overall reorganization of the ETF business model.
Thus, the fee war in the ETF market is bringing fundamental changes to the business model and competitive landscape of the asset management industry, beyond simple price competition. Particularly given the characteristics of the ETF market, where economies of scale and network effects are strong, this fee war is likely to act in a direction that strengthens the winner-takes-all structure. While there is a direct benefit of cost reduction for investors, there is also a need to consider the impact on market diversity and innovation in the long term.
💡 Future Outlook for the ETF Market and Investment Implications
As fee competition intensifies, how will the ETF market evolve and what should investors consider?
First, structural changes in the ETF market are expected. If the current fee war continues, the market is likely to become more polarized. Large management companies will maintain low-cost strategies based on economies of scale and expand market share. Mid-small management companies are expected to focus on niche markets or pursue premium strategies based on specialized expertise. Also, as seen overseas, 'restructuring' may take place where small ETFs below a certain size are merged or withdrawn from the market. In the long term, alliances or integration between ETF management companies and distribution platforms (securities firms, fintech companies, etc.) are also expected to accelerate. These structural changes will also affect the ETF selection environment for investors.
Second, product innovation and differentiation will emerge as important competitive factors. As sustainable differentiation becomes difficult with fees alone, management companies are expected to focus more on innovative product development. Competition is expected to intensify particularly in high value-added areas such as active ETFs, thematic ETFs, and ESG ETFs. Also, ETFs providing access to new investment strategies or asset classes that did not exist before will increase. Innovative products such as single stock option ETFs, buffer ETFs, and target maturity ETFs have already emerged overseas, and these trends are likely to spread domestically as well. While more diverse options will be provided to investors, the complexity of products will also increase, potentially making selection more difficult.
Third, competition in technology and service aspects will also strengthen. As the fee revenue from ETFs themselves decreases, management companies are expected to focus on creating value through additional services. Providing comprehensive investment solutions such as customized portfolio suggestions, asset allocation solutions, and tax optimization strategies will become important. User experience improvement through digital platforms and data-based investor education will also be strengthened. The trend of integration with asset management services centered on ETFs is also expected to accelerate. Investors will need to make choices considering such comprehensive service ecosystems, not just ETF products.
Fourth, the selection criteria that investors should consider are diversifying. In a situation where fees have become extremely low, investors need to comprehensively consider the following factors in addition to fees: ① tracking error (difference between the ETF's performance compared to the underlying index), ② liquidity and trading volume (ease of trading and spread), ③ tax efficiency (dividend policy, trading strategy, etc.), ④ composition method and rebalancing cycle of the underlying index, ⑤ expertise and track record of the management company, ⑥ transparency of the product and level of information provision. Especially for thematic and active ETFs that are increasing recently, it is important to understand the investment philosophy and strategy of the product. Ultimately, ETF selection should be a comprehensive value assessment, not a simple price comparison.
Overall, the fee war in the ETF market is fundamentally changing the business model of the asset management industry. While there is a direct benefit of cost reduction for investors, it will also affect market structure and product diversity. In the future, the ETF market is expected to evolve towards providing more innovative and customized investment solutions beyond simple index replication. Investors need to understand these changes and evaluate ETFs from a more comprehensive perspective for choices that fit their investment goals and situations.
4️⃣ In Conclusion
As the domestic ETF market surpasses 180 trillion won and rapidly grows, the intense fee war between Samsung Asset Management and Mirae Asset Management shows an extreme competitive aspect where 'one must be number one even if not profitable.' While this fee reduction competition brings direct benefits to investors in terms of cost reduction, concerns are also raised about market diversity and innovation, and the possibility of entry for latecomers. The future of the ETF market is expected to expand to competition in various areas such as product innovation, service differentiation, and technology advancement, beyond simple fee competition.
From an investor's perspective, there is a need to strategically utilize these changes in the ETF market. Low fees definitely have a positive effect on long-term investment performance, so it's worth considering low-cost products from large management companies for basic ETFs that track core indices. However, it is not advisable to select ETFs based on fees alone. A comprehensive evaluation should be made, including tracking error, liquidity, trading volume, composition method of the underlying index, and the expertise of the management company. Especially for thematic and active ETFs, it is important to understand the investment philosophy and strategy of the product.
From the perspective of asset management companies, it is necessary to seek differentiation strategies beyond simple price competition. Large management companies should maintain low fees for core products based on economies of scale, while investing in innovative new product development and service quality improvement. For small and medium-sized management companies, it may be effective to strengthen expertise in specific areas or adopt a concentration strategy targeting niche markets. Building a comprehensive service ecosystem centered on ETFs, including digital platforms, asset allocation solutions, and educational content, can also be an important strategy.
Policy authorities and market participants need to find a balance for the healthy development of the ETF market. Appropriate regulation and supervision are needed to ensure that excessive fee competition does not distort market structure or cause problems in investor protection. At the same time, it is important to create an environment where investor benefits can be maximized through innovation and competition. In particular, support should be provided through strengthening investor education and information provision so that investors can understand various factors needed for ETF selection beyond fees.
In conclusion, the fee war in the ETF market will be an important turning point that changes the landscape of the asset management industry. While some companies may be withdrawn from the market or integrated in this process, ultimately a more efficient and investor-centric ETF ecosystem is expected to form. Investors need a wise approach that comprehensively considers various factors, not just fees, to select ETFs that match their investment goals, understanding these industry changes.