FSS Investigates Korea Investment Management Over SpaceX ETF

Headquarters office of Korea Investment Management. Controversy is brewing over an active exchange-traded fund (ETF) managed by Korea Investment Management. This comes as it was confirmed that there is a significant discrepancy between the ‘ETF basket details (PDF, portfolio deposit file)’ disclosed daily to investors and the actual internal data of the asset management company. On Oct. 16, the Financial Supervisory Service (FSS) launched an investigation into Korea Investment Management regarding the controversy over exceeding the SpaceX weight in the relevant ETF, which includes verifying the written explanation on whether the actual internal details match the PDF. The controversial product is Korea Investment Management’s ‘ACE US Space Tech Active’ ETF. When launching this product, Korea Investment Management promised, “We will include SpaceX up to a maximum of 25%.” This was also specified in the product prospectus. However, looking at the portfolio (PDF) disclosed to investors on this day, the inclusion weight of SpaceX reaches 38.05%. This figure exceeds the upper limit by more than 12%P. Since SpaceX was included on June 12, the weight of SpaceX in the PDF has never fallen below 25% for a single day. Regarding the controversy over exceeding the weight limit, Korea Investment Management explained, “This is a phenomenon that occurred as the stock price of SpaceX showed a relatively solid trend.” This means that as the stock prices of other items in the ETF fell, the weight of SpaceX relatively increased. The company then added, “The disclosed PDF weight is calculated by separating only ‘stocks’,” and “Because the internal account book calculates a larger total size by combining all other assets such as cash and accrued fees, the current SpaceX stock weight is at a level slightly over 25%.” This essentially means there is a difference of more than 10%P between the PDF disclosed to investors and the internal ETF asset data. An official from an asset management company stated, “Reflecting the actual asset composition exactly in the PDF is a principle of the ETF market,” and “If the actual assets and the disclosed details are significantly different, it is a serious issue.” Looking at the currently disclosed asset composition of this ETF, overseas stocks account for about 92%, and other assets account for 8%. Regarding the identity of the other assets, Korea Investment Management replied, “They are non-stock fund assets, including surplus cash.” However, there is also considerable controversy regarding this part. According to the financial investment industry, most of the money that flows into equity ETFs should be utilized to purchase individual stocks. The reaction is that accumulating other assets enough to shift the weight of a specific item by more than 10%P is itself difficult to view as normal management. The financial authorities are conducting an investigation into whether the ETF violated the Financial Investment Services and Capital Markets Act. The Financial Investment Services and Capital Markets Act stipulates that if a weight limit is unavoidably exceeded due to a sudden fluctuation in stock prices, the stocks must be sold within a three-month grace period to restore the weight to its original state. An official from the Financial Supervisory Service said, “The time when the excess weight of the product first occurred is identified to be around on June 17,” and “It may already be in a state that has passed the three-month grace period.” On the other hand, Korea Investment Management is countering, saying, “On the exposed PDF, the SpaceX weight exceeds 25%, but based on the internal account book, it first exceeded 25% on Oct. 2, so there is a grace period remaining until the end of the year.” However, to an additional question asking, “Has it ever exceeded the 25% limit even before on Oct. 2?,” the company replied, “It is difficult to provide an additional answer as we are reviewing the data while checking the standards with the authorities.” Experts advise that it is necessary to secure the ledger (trading details) of the ‘fund administrator’ who prepares the actual household account book of the ETF on its behalf and compare it with the PDF. An official from the Korea Exchange said, “It is necessary to comprehensively look into whether the exposure to SpaceX was increased by including SpaceX-related derivatives listed overseas, or whether only pure stocks were included.”