'Shudro Fire generation (early retirement generation) in just 10 years'
Employee Lee (30) has been purchasing a domestic exchange-traded fund (ETF) modeled after the U.S. representative dividend ETF 'Schwab (SCHD)' through a savings plan for over a year. Lee reinvested the monthly dividends received through the Individual Comprehensive Asset Management Account (ISA). Lee expressed satisfaction while watching the growing account balance.
However, Lee recently liquidated all ETFs in the ISA account. He noted, "I thought it was strange that the dividend amount was lower than usual, and I also found out that the tax benefits had disappeared," adding, "The government says it will come up with a plan, but I do not want to invest in the Korean stock market anymore, as I do not know how things will change."
As issues regarding double taxation on overseas funds contained in tax-free accounts emerged, funds have been flowing out of the 'Korean version of Shud' ETF, which had been gaining popularity among individual investors. Instead, investors have begun transitioning to overseas covered call ETFs or domestic high-dividend stock ETFs that offer tax-saving benefits.
According to the Korea Exchange, individuals net sold 6.1 billion won worth of the TIGER U.S. Dividend Dow Jones ETF on the 13th. Individuals have continuously maintained a 'sell' stance on this ETF for seven trading days from the 5th to this day. This marks the longest consecutive net selling period. The total net selling during this period has increased to 64.5 billion won.
The TIGER U.S. Dividend Dow Jones ETF is the largest among four Korean versions of Shud. It has gained popularity among individuals, even earning the nickname 'Tamidang'. The appeal lies in the tax-free account, which allowed individuals to be exempt from dividend income tax up to a certain limit and benefit from tax deferral effects until maturity. The fact that it provided monthly dividends, creating a steady cash flow, was also a factor in its popularity.
The fact that the external tax deduction method has changed has been belatedly revealed, altering the atmosphere. Previously, when a fund incurred taxes to be paid to a foreign entity, it would pay the tax and then receive a refund from the National Tax Service. The fund added the refund to provide dividends to investors.
This refund process has disappeared. Funds will now provide dividends to investors after deducting the taxes paid to foreign entities. As a result, the tax-deferral and low-rate tax benefits associated with tax-free accounts have vanished, leading to a double taxation situation where individuals pay taxes to foreign entities and then also pay taxes on pension income later.
The government hurriedly announced plans to allow deductions for taxes paid to foreign entities at maturity regarding ISA accounts, but more time is needed for pension savings funds and individual retirement pensions (IRPs) as legal amendments are required. This situation has also led individuals to turn to net selling in Korean versions of Shud, such as SOL U.S. Dividend Dow Jones and ACE U.S. Dividend Dow Jones.
Investors have chosen 'monthly dividend covered call ETFs' as alternative investment options. The main source of monthly dividends provided by covered call ETFs is revenue generated from selling call options on the underlying assets, which is unrelated to the changed external tax deduction method.
KODEX U.S. Dividend Covered Call Active is a representative example. Before the controversies surrounding the external tax deduction method arose, individuals net purchased this ETF at an average of about 3 billion won per day, but since the 10th, this figure has jumped to over 6 billion won.
Individuals have also increased their investments in ETFs based on domestic high-dividend stocks. This is likely due to the absence of double taxation issues in tax-free accounts, unlike overseas investment funds. The PLUS high-dividend stocks and TIGER Bank High Dividend Plus TOP 10 have been named as ETFs with significant net buying by individuals.
Kang Jin-hyuk, a researcher at Shinhan Investment Corp., said, "Domestic dividend stock ETFs could be an alternative," noting, "Given that the market was sluggish in the second half of last year, the KOSPI's own dividend yield has become more attractive at around 2.7%."