South Korea’s Shinhan BNP Paribas Asset Management listed a new synthetic exchange-traded fund (ETF) on the Korea Stock Exchange (KRX) yesterday.

The Shinhan BNPP Smart Synthetic - MSCI World Index ETF is linked to the MSCI World Index, which captures large and mid-cap stocks across 23 developed countries, investing in more than 1,600 constituents.

Seoin Kim, vice-president at Shinhan BNP Paribas Asset Management, told SRP that as all the collaterals are denominated in Korean won, only the performance linked to the underlying asset will be exposed to the currency risk.

“Similar to the Hanwha Asset Management’s Arirang Synthetic ETF - AC World, we will be providing the cash to the derivatives counterparty in return of the yield generated based on the underlying,” he said. “Although we are yet to see how the ETF actually performs for a certain period, we observed a tracking error of 1% according to our internal back-testing.”

A spokesperson at the firm also told SRP that the new synthetic ETF is suitable for investors seeking direct exposure to developed countries for diversification and core investment.

“Since the total management and administrative fees are as low as 0.35%, which is more competitive than typical mutual funds and similar ETFs, it should be an efficient investment tool in terms of the yield and costs over the long term,” said the spokesperson.

Mirae Asset Securities will be backing the underlying as the derivatives counterparty. It is also an authorised participant and liquidity provider of the Shinhan BNPP Smart Synthetic - MSCI World Index ETF.

Kim however pointed out that tax issues around the synthetic ETF still weigh on demand from high-net-worth individuals who might not be drawn to the local synthetic ETF market but instead invest in overseas securities directly.

“The easing of regulation on this matter would definitely help the market grow further,” concluded Kim.

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