190625 BTS
Faces ‘uphill battle in reaching their target market’: BI Image Credit: Reuters

Seoul: Gather around BTS and Korean pop music fans, a new exchange-traded fund is debuting.

Contents Technologies is launching the KPOP and Korean Entertainment ETF (ticker K-Pop) on the NYSE Arca Exchange Sept. 1. K-Pop is the first fund in the US or Europe to invest in firms benefiting from Korean pop music, according to Bloomberg Intelligence.

The fund will track an index - dubbed the K-Pop Index and created by CT Investment, a subsidiary of Contents Technologies - that will include 30 companies in the entertainment and interactive media industries that are listed on the Korean Exchange.

The K-Pop Index aims to measure the performance of Korean entertainment companies including HYBE Co., the agency that manages the South Korean boy band phenomenon BTS, JYP Entertainment Corp., SM Entertainment Co. and YG Entertainment Inc. The index will weigh entertainment firms more, 70 per cent to 80 70 per cent, than others in the interactive media and services space.

"What makes us excited about this is being the first vehicle that provides global investors and global fans, who had difficulty investing in K-Pop previously, exposure to the companies they have fan-ship of," Jangwon Lee, chief executive officer at CT Investments and Contents Technologies, said in a phone interview from Korea.

South Korean music has gained fans in the US since it captured the world's attention in 2012 with the hit "Gangnam Style." In February, BTS was named the global recording artist of the year, beating Taylor Swift and Adele. Meanwhile, the girl group Blackpink, managed by YG Entertainment, became the first musical artists to hit a record 75 million subscriber mark on YouTube in June, overtaking Justin Bieber.

Members of the KPOP Index, which will be rebalanced quarterly, are selected by a proprietary artificial intelligence algorithm that uses natural language processing technologies. The AI determines if companies are engaged in K-pop related businesses by scanning for keywords in public business descriptions on the internet. Companies are required to have a market capitalization of about $76 million on the Korean Exchange to be considered and there's a 9.85% cap for any individual company.

In recent months, shares of HYBE, JYP, SM and YG have risen from their June lows, even amid the global market downturn.

"There have been very good earnings of these companies that came due to post-Covid openings of offline performances," said Lee, who is 29 years old and a self-described K-pop fan. "Regardless of the general market sentiment, which is also quite bearish in Korea, these entertainment companies under our constituents, have performed very well. So, we are quite confident."

Still, the K-Pop ETF faces challenges.

"Thematic ETFs are ever coming up with narrower and creative slices of investment strategies," said Henry Jim, ETF analyst at Bloomberg Intelligence. "Although KPOP stands out in its clear focus on one industry in one country, they will have an uphill battle in reaching a target market that's difficult to define. I fear they may be left with only 'individual fans' as a limited addressable target market."

The KPOP ETF is designed for retail investors and investment professionals who believe in Korean entertainment businesses, according to Lee.

Established in 2020, Contents Technologies builds and invests in intellectual properties as well as businesses related to technology, finance and services within the content value chain. The K-Pop ETF is the company's first fund. Exchange Traded Concepts is the investment adviser while Moorgate Benchmarks is the index administrator of the new ETF.

"We are interested in opening up additional ETFs that echo our focus in the Asian content market," Lee said. "But as of now, we do want to very much focus on and keep up with one of the biggest identities of Korea and Asia. We hope to make this pretty successful before we go on to the next one."