Brokerages are set to launch single-stock leveraged exchange-traded funds (ETFs) that track twice the daily returns of Samsung Electronics and SK Hynix, prompting a fee competition among asset managers.

As of May 19, the financial investment industry says eight managers - Samsung Asset Management, Mirae Asset Management, Korea Investment Management, KB Asset Management, Shinhan Asset Management, Hanwha Asset Management, Kiwoom Asset Management and Hana Asset Management - plan to list 16 single-stock leveraged and inverse ETFs tied to Samsung Electronics and SK Hynix on May 27.

Of those, 14 are leveraged ETFs and 2 are inverse ETFs. It is the first time single-stock leveraged and inverse ETFs will be listed in South Korea.

The products use Samsung Electronics and SK Hynix shares as underlying assets, rather than indices such as the KOSPI200. The leveraged ETFs are structured to track twice the underlying assets' daily returns. The inverse products are designed to generate gains when the underlying assets fall.

Samsung Asset Management, Mirae Asset Management, Korea Investment Management, KB Asset Management, Kiwoom Asset Management and Hana Asset Management will each roll out leveraged ETFs linked to Samsung Electronics and SK Hynix.

Shinhan Asset Management plans to list an SK Hynix leveraged ETF and an SK Hynix futures inverse ETF. Hanwha Asset Management plans to list a Samsung Electronics leveraged ETF and a Samsung Electronics futures inverse ETF.

The focus of early competition is management fees. With multiple products tied to the same underlying shares launching at once, investors are likely to compare brand, trading volume, fees and bid-ask spreads when choosing products.

Mirae Asset Management set the total annual fee for its TIGER ETF at 0.0901 percent. Korea Investment Management's ACE ETF, KB Asset Management's RISE ETF and Hana Asset Management's 1Q ETF are each set at around 0.091 percent a year. Shinhan Asset Management set the annual fee for its SOL ETFs at 0.1 percent for both the SK Hynix leveraged and inverse products.

Hanwha Asset Management lowered the annual fee for its Samsung Electronics leveraged ETF to 0.1 percent, but set the Samsung Electronics inverse ETF at 0.49 percent a year. Kiwoom Asset Management's KIWOOM ETF is set at 0.25 percent a year, and Samsung Asset Management's KODEX ETF at 0.29 percent.

Single-stock leveraged ETFs, however, tend to be geared more toward short-term trading than long-term investment. Some also point out that fee differences alone are unlikely to determine an investment decision.

Industry estimates show that if 100 million won is invested for 3 days, the fee burden would be about 2,382 won for the KODEX leveraged ETF and about 741 won for the TIGER leveraged ETF, a difference of about 1,641 won. If 1 million won is invested for 3 days, the figures are about 24 won and about 7 won, respectively.

In short-term investing, costs incurred during actual trading can be larger than fees. A representative example is slippage. Slippage refers to the difference between the price an investor wants and the price actually executed. If trading volume is insufficient or bid-ask spreads widen, losses from execution price differences can be larger than fee differences.

Leveraged ETFs are also harder to manage because they must track twice the underlying assets' daily returns. Even if the underlying assets are heavily traded shares such as Samsung Electronics and SK Hynix, leveraged products still require quotes from liquidity providers (LPs) and tracking management by asset managers. If quotes are not tight, investors may have to accept less favourable prices than expected when buying and selling.

The competition is therefore likely to shift beyond a simple race to the lowest fees toward the trading environment after listing. Low fees may attract investor interest early on, but over time trading volume, quote quality, LP response and tracking error could serve as selection criteria.

An industry official said, "Leveraged ETFs are highly volatile products, and to track twice the daily return, liquidity management and management capabilities are important," adding, "If fees fall too low, it could create burdens in LP management or product operation."

The official added, "Short-term leveraged investors should also look at whether they can trade at their desired price, and whether trading volume and quotes are sufficient, not just fees," and said, "A single execution error can have a bigger impact on investment performance than fee differences."