Investors Burned After Trusting "Korea’s First, Lowest-Fee" ETF Ads...FSS Issues Investor Alert

[The Financial News] The Financial Supervisory Service (FSS) urged investors to carefully check the possibility of principal loss, investment risks, returns, and the total expense ratio before investing in an exchange-traded fund (ETF).
According to the FSS on the 5th, the net assets of domestic ETFs jumped from 74 trillion won at the end of 2021 to 297.2 trillion won at the end of last year, with the market roughly quadrupling in four years. The number of listed products also doubled from 533 in 2021 to 1,058 at the end of last year.
The FSS stressed that investors must recognize in advance that ETF products can result in a loss of principal. The agency noted that advertisements are repeatedly promoting products in a way that suggests they pay stable interest like a bank deposit, even though principal losses are possible. For example, an ETF with a target annual distribution rate of 10% might be marketed with phrases such as "If you invest 100 million won, you can receive 1.5 million won every month." Distributions are paid from dividends and interest generated by the ETF’s underlying assets, such as stocks and bonds. As distributions are paid out, the ETF’s net asset value declines, and if the prices of the underlying assets fall, investors can incur losses.
Investors also need to review the key risk factors that come with each ETF’s characteristics. Some products promote gold spot ETFs by claiming that, unlike investing in a futures exchange-traded fund (futures ETF), there are no rollover costs, so returns are higher. On this point, the FSS explained, "By unilaterally emphasizing only the superiority of a particular management method, such advertising can hinder investors’ ability to assess the pros and cons of each product," adding, "Gold spot and futures ETFs are not a matter of one being better than the other, but of different product structures and investment strategies."
The watchdog also warned investors to be cautious about products that promote performance based solely on returns over a specific period. One example is a covered call exchange-traded fund (covered call ETF) that is advertised using returns from a period when market volatility was high and profits were temporarily elevated. The FSS said, "There is a risk that short-term, one-off performance driven by temporary factors is overly highlighted, inducing investment decisions that do not sufficiently take into account long-term performance or volatility."
In addition, the FSS emphasized that investors should check fees beyond those highlighted in advertisements. ETFs incur not only a total expense ratio but also other fees and securities transaction costs. However, ads often exclude these actual costs, so investors need to be careful. The FSS pointed out, "Some products are advertised as having the 'lowest fee in Korea,' but in reality only the total expense ratio is low, while the synthetic total expense ratio, which includes other fees, is higher than competitors’." It added, "There are many cases where products are promoted with a total expense ratio in the 0.0% range, but this figure only highlights certain items such as the management fee, while other costs actually borne by investors are omitted."
The agency further cautioned investors about advertisements that use phrases such as "Korea’s first," "overwhelming No. 1," or "lowest volatility" to claim that a product is far superior to competitors’ offerings.
nodelay@fnnews.com Park Ji-yeon Reporter