Starting July 1, all exchange-traded funds (ETFs) managed by domestic asset management companies, except for domestic equity funds, must distribute interest and dividends. Accordingly, the 'automatic reinvestment (TR total return)' that automatically reinvested the distribution within the fund is expected to be possible only for domestic equity ETFs.
Investors who invested in TR ETFs need to carefully check the amount, record date, and payment cycle of the newly generated distributions. This is because dividends tax is withheld every time a distribution is paid. Depending on the accumulated amount of dividend income, it may also be included in the comprehensive taxation on financial income.
According to the financial investment industry on the 30th, starting in July, the distribution of interest and dividends from overseas equity, bond, and interest ETFs managed by domestic asset management companies will become mandatory. This is in accordance with the revised income tax law, which requires that the dividend revenue generated from ETFs must be settled and distributed at least once a year.
Until now, some of these products were managed under the TR method, which automatically reinvested interest and dividends without paying them to investors. This structure allowed investors to benefit from compound effects and tax deferral effects simultaneously. The longer the investment, the more interest and dividends were reinvested, maximizing the compound effect, and taxation occurred only once at the point of selling the ETF, making it very popular in retirement accounts.
However, earlier this year, the Ministry of Economy and Finance raised concerns that the TR structure was contrary to tax equity with general ETFs. Particularly, there were controversies over tax privileges because it effectively allowed deferral of dividend taxes indefinitely. Ultimately, considering the policy goal of revitalizing the domestic stock market, TR was banned for all products except domestic equity ETFs.
As a result, asset management companies began to address the overseas equity TR ETFs, which had become the main target of the regulations. They have removed the 'TR' designation from existing TR products and switched the underlying index to distribution payments (PR price return), which distribute dividends monthly or quarterly. Starting with Samsung Asset Management's 'KODEX U.S. S&P 500 TR' ETF, 'TIGER U.S. NASDAQ 100 TR (H)' ETF, and 'SOL U.S. Dividend Dow Jones TR' ETF have followed the same process.
By the end of this month, most asset management companies have announced the schedules for dividend payments on interest, bond, and derivative products. Even products that primarily contained growth stocks and had insufficient funds for distributions will now also adhere to mandatory distributions at least once a year. The ETFs subject to conversion include 75 types from Mirae Asset Global Investments, 73 types from Samsung Asset Management, 64 types from KB Asset Management, and 55 types from Korea Investment Trust Management.
Since dividends for products that previously had the TR structure will not be automatically reinvested going forward, investors will have to directly reinvest the distributions, incurring the hassle and burden of trading fees. There will also be a phenomenon where the net asset value (NAV) of the ETF decreases by the amount of the dividends (distribution drop).
The most crucial aspect to be mindful of is taxation. Taxation occurs every time interest and dividend income is paid out. Furthermore, if the combined amount of interest and dividend income exceeds 20 million won annually, it becomes subject to comprehensive taxation on financial income. There are recommendations to meticulously check the distribution schedules and amounts from each management company and adjust portfolios accordingly.
Until now, TR ETFs had a structure where taxes were paid all at once at the time of sale, allowing investors to manage their year-end or early-year sale points to avoid exceeding the annual financial income of 20 million won. In the future, since taxes will be withheld every time distributions are paid, existing tax-saving strategies will likely no longer be effective.