Study on Korean ETF Market: Tracking Errors of Synthetic ETFs

The ETF market in Korea and Taiwan both initiated in early 2000, while there has been obviously different development between the two. As to the amount of products, there were almost two hundred listed ETF products in Korea up to 2015, yet there were merely forty-six in Taiwan, quite a significant difference. Therefore, this paper examines the Korea ETF market to analyze the fundamental differences of characteristics as well as the performance of synthetic ETF, which Korean investors prefer, serving as a reference for future development of ETF market in Taiwan. The empirical evidence indicates that, under 1% significant level, the tracking errors of general, leveraged, and inverse ETF in Korea are significantly different from zero. The potential variables that may affect tracking errors were further investigated using multiple regression analysis. The result suggests that there is positive correlation between tracking error and benchmark index volatility. For the number stocks of benchmark index and trading volume, tracking error has positive correlations with the two. However, AUM, duration, and types of products all have negative correlation with tracking error. Although ETF products are passive investment instruments, investors may consider the factors mentioned to measure tracking errors when making decision and manage their portfolios effectively.