The Korea Exchange (KRX) has launched two Kosdaq 150 strategy indices and 10 currency derivative strategy indices in a move to provide various investment tools in the Kosdaq and its currency derivative markets as the exchange seeks to stimulate both markets and activate the development of investment products.
The strategy indices that KRX has developed are underlying indices for ETPs and related products and they will be listed on the KRX market shortly, said Myungwoo Park (pictured), head of index marketing at the KRX, adding that strategy indices are one of the most attractive vehicles available as they provide an opportunity to make profits under any circumstances.
“[Strategy indices] are also suitable for retail markets since retail investors could choose any products based on their risk preference,” said Park.
According to a market survey, said Park, demand for ETFs and ETNs based on the Kosdaq 150 index and currency derivative strategy indices is high. “As the demand for index tracking trades and hedge and arbitrage trades increases, more professional investors’ participations in Kosdaq and currency derivative markets as well as the trades of Kosdaq stocks and derivative products are expected to grow,” said Park.
The Kosdaq 150 benchmarks comprise an equal weighted index and a leverage index that have been developed based on the Kosdaq 150 index. The equal weighted index is calculated on the equal proportion (1/150) of 150 listed stocks on the Kosdaq market regardless of the market capitalisation size; while the calculation of the leverage index is linked to the double of daily fluctuation rate of the Kosdaq 150 index.
The exchange’s currency derivative strategy indices are comprised by futures, leverage and inverse (1x to 3x) indices that track euro and yen futures with high marketability. The futures indices use the near-term month contract price of listed euro and yen futures on KRX currency derivative market, while the leverage indices are linked to the double of the daily fluctuation rates for euro or yen futures indices. The calculations of inverse indices apply a multiplying factor of -1, -2 and -3 times, respectively, of the daily fluctuation rates for euro or yen futures indices.
According to Park, the indices suit a number of investment strategies to pursue excess return according to the market conditions and investors’ risk preference, with the futures indices providing a useful benchmark for leverage indices and inverse indices calculations. The leverage indices would be appropriate for investors who expect price advances of underlying assets, and inverse indices generate profits when the market is bearish, said Park.
The launch follows the introduction of the Kosdaq 150 index in July as a representative index of the Kosdaq market such as the Kospi 200 which was developed to cope with the recent increasing volatility in foreign exchange, and stimulate the use of more investment instruments such as ETFs and index funds, and risk-hedging investments and promote the trades in the currency derivatives market, as well as increasing the participation of domestic and foreign institutional investors.
KRX plans to develop various investable strategy indices to provide wide-ranging investment tools for market participants and support the trade vitalisation in both stock and derivative markets, said Park.
“Expectations for new ETP products have never been higher in Korea. Supplying new indices will be a solid base of market growth as it will present continuous capital inflow to our market,” said Park. “Due to the recent low interest rate and low volatility environment in Korea, middle risk middle return products such as dividends, smart beta, etc. are popular in the Korean market.”
The Kospi 200 index is the most widely used underlying in South Korea’s structured products market, with 19,578 outstanding products linked to it. This year, 7,341 products linked to the Kospi 200 worth KRW24tr (US$20bn) have been marketed locally.
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