The financial regulator said Sunday that it will allow public and private pension funds to invest in exchange traded funds in a bid to provide a safer and decent yield-generating investment tool in the low rate environment.

An ETF refers to an investment fund traded on stock exchanges and represents a basket of stocks that reflects an index, which provides retail investors and institutions with a more liquid and risk-hedging tool.

The Financial Services Committee will revise related regulations to let the National Pension Service, the country's largest institutional investor, and individual pensions include the ETFs in their investment portfolios.

The Government Employees Pension Service is the only public investor to be allowed to participate in the ETF market.

The FSC will also loosen a stake restriction on the ETF by mutual funds to attract more individual investors, raising the ceiling to 50 percent. Under the current laws, a mutual fund is banned from owning a stake of more than 20 percent in an ETF.

There will be tax incentives for some ETFs that track foreign stock market indices, it added.  

"The ETFs can be a good choice for individuals and institutions who seek medium-risk, medium-return investments," said Ahn Chang-kuk, director of the Asset Management Division at the FSC.

"Pension funds can also build more stable portfolios by adding the ETFs."

Since being launched in 2002, South Korea's ETF market has sharply drawn investors seeking safer investment vehicles, with assets under management reaching 19.7 trillion won ($16.7 billion) at the end of 2014.

The global ETF market has also grown sharply, but the country's average daily trading volume of ETFs has been on a decline since it peaked at 792.5 billion won in 2013, as the local stock market has been tucked in a tight range in recent years.

Individual investors accounted for 35.9 percent of the market turnover as of end-July, while institutions took up 23.7 percent.

The FSC said it will also encourage brokerage houses and asset management firms to introduce various types of ETFs pegged to commodities prices and a certain industries, such as gold ETFs, oil ETFs and semiconductor ETFs. Currently, over 68 percent of local ETF are tracking South Korean stock market indices including the KOSPI 200 Index.

The FSC said the plan is designed to boost the ETF market to meet investors' demand for higher, safer returns at a time of low interest rates. (Yonhap)