Korea Exchange (KRX) on May 16 sent guidelines to major asset management companies requiring prior consultation before changing keywords used in ETF index calculations, according to a May 21 report. The move targets industry practices where asset managers restructure existing ETF compositions by modifying keywords without proper oversight. Keyword methodology, which scores companies' relevance to specific terms to select index constituents, has been increasingly used in thematic ETFs due to its flexibility compared to traditional industry classification systems.
Keyword Methodology Enables Flexible ETF Restructuring
Index constituent selection methods are broadly divided into industry/sector classification systems and keyword scoring approaches. Thematic ETFs frequently adopt keyword scoring as their index calculation standard, as this method facilitates selecting related stocks across multiple industries or themes absent from traditional industry classifications.
Keyword methodology quantifies similarity between specific terms and companies, incorporating high-scoring stocks into the index. This approach offers greater flexibility in adjusting investment targets compared to following fixed industry classifications. When new technologies emerge, asset managers can add related keywords to commercialize nascent themes.
Korea Investment Management in December changed 'ACE Fn5G Plus' to 'ACE Korea AI Tech Core Industry' and restructured the underlying index calculation standards. Unlike the composition at listing five years prior, the fund removed most 5G equipment stocks and increased weightings in large-cap technology stocks. In September, the company also changed 'ACE Nuclear Theme Deep Search,' listed four years earlier, to 'ACE Nuclear TOP10,' converting the product from broad diversification across nuclear-related stocks to concentration in a small number of representative stocks with substantially increased weightings.
One asset management industry source stated that while index revision authority belongs to index calculation agencies, these agencies typically accommodate requests from asset managers using their indices, particularly as private index providers including FnGuide and NH Investment & Securities have proliferated alongside KRX.
Samsung and Mirae Asset Restructured ETF Compositions Through Index Changes
Samsung Asset Management in May changed its 'KODEX AI Semiconductor' name to 'KODEX AI Semiconductor TOP2 Plus' and increased Samsung Electronics and SK Hynix weightings to over half the portfolio. Last month, the company conducted restructuring to newly incorporate stocks including SK Square.
Mirae Asset Management's 'TIGER Semiconductor TOP10' recently implemented special changes approximately three months ahead of scheduled regular rebalancing, newly incorporating SK Square and other stocks. While the company modified industry/sector classification systems rather than keywords to enable stock incorporation, the case represents similar restructuring of investment targets through index calculation standard changes.
One financial investment industry source noted that some asset managers have been detected misusing the keyword approach to alter product characteristics to suit preferences, pointing out that while passive ETFs should allow investors to reasonably predict constituent changes, arbitrary keyword modifications make them effectively indistinguishable from active ETFs.
KRX Warns Unauthorized Keyword Changes May Trigger Delisting
KRX emphasized in guidelines distributed to asset managers that changing keywords used in constituent selection constitutes modifying index calculation standards, which may correspond to delisting requirements under current regulations. Article 116(1)(2)(b) of current Securities Market listing regulations allows KRX to delist ETFs when underlying index calculation standards change.
Exceptions apply when: 1) calculation standard changes are unavoidable, and 2) KRX recognizes that the traded market for underlying assets and main investment target assets remain identical after calculation standard changes, with continuity maintained in the index's inherent objectives.
KRX stated that in cases where asset managers wish to change keywords, they must consult with the exchange beforehand and proceed through official change request procedures, as the exchange may apply delisting exceptions only in cases it recognizes under current regulations.
KRX also requested that asset managers clearly establish keyword hierarchy and importance from the index design stage. For example, in semiconductor-related indices, the upper-level concept 'semiconductor' and lower-level concept 'HBM' (high bandwidth memory) cannot be considered to hold equal importance. The exchange explained that standards enabling judgment of whether index identity and continuity are maintained when keywords change in the future must be established in advance.
KRX recommended that asset managers predetermine importance and application order for each keyword, requesting index change reviews only for changes between keywords of similar importance.
FAQ
What did Korea Exchange require from asset managers on May 16?
Korea Exchange on May 16 sent guidelines to major asset management companies requiring mandatory prior consultation before changing keywords used in ETF index calculations. The exchange emphasized that unauthorized keyword changes constitute modifying index calculation standards, which may trigger delisting under Article 116(1)(2)(b) of Securities Market listing regulations.
How did Samsung Asset Management restructure its AI semiconductor ETF?
Samsung Asset Management in May changed 'KODEX AI Semiconductor' to 'KODEX AI Semiconductor TOP2 Plus' and increased Samsung Electronics and SK Hynix weightings to over half the portfolio. Last month, the company conducted restructuring to newly incorporate stocks including SK Square through index calculation standard modifications.
