This year, high-dividend exchange-traded funds (ETFs) that gained immense popularity due to policy benefits are suffering from capital outflows following the announcement of a tax reform plan centering on increased taxes. The government's announcement on separating the taxation of dividend income has fallen short of investors' expectations. Selling pressure from individual investors has also been observed in bank stocks that had risen in expectation of increased dividends and the separation of dividend income from taxation.
According to KOSCOM ETF checks on the 6th, the PLUS high-dividend ETF, which has the largest net worth among domestic high-dividend ETFs, saw a net outflow of 11 billion won in just one day (on the 5th). The total net capital outflow from the 1st to the 5th amounted to 44.4 billion won.
Funds are also flowing out of other high-dividend ETFs. Between the 1st and 5th, KODEX high-dividend ETF saw 2.5 billion won, SOL Financial Group Plus high-dividend ETF 5.4 billion won, TIGER KOSPI high-dividend ETF 600 million won, and KIWOOM high-dividend 700 million won in net outflows.
There has been a continued wave of net selling from individual investors in bank stocks. From the 1st to the 5th, following the announcement of the tax reform plan, individual investors sold off Shinhan Financial Group stocks worth 20.1 billion won. Other sales included KB Financial 3.6 billion won, Woori Financial Group 15.8 billion won, BNK Financial Group 1.9 billion won, and iM Financial Group 3.2 billion won. Despite the bank stock prices rising for three consecutive trading days from the 4th to this day, individuals have started to sell off.
The continued net selling of high-dividend stocks and ETFs by individuals is interpreted to be largely influenced by the tax reform plan announced on the 31st of last month. Both high-dividend ETFs and bank stocks were expected to benefit from the introduction of the separate taxation of dividend income, leading to a surge in investor buying pressure. If dividend income is taxed separately at a lower rate, it would reduce the tax burden, and related listed companies are also expected to increase their dividends.
However, the criteria for the separate taxation of dividend income announced by the government turned out to be more stringent than expected, and the applicable tax rate was set relatively high. According to the tax reform plan, corporations that can benefit from the separate taxation of dividend income must have a payout ratio of over 40% or a payout ratio of over 25% with an increase of 5% in cash dividends compared to the average of the previous three years. As a result, the sentiment toward investing in high-dividend stocks is quickly cooling.
Hyundai Motor Securities expected that about 325 stocks would benefit if a plan was implemented to provide tax benefits to corporations with a payout ratio of over 35%. However, it forecasted that under the current tax reform plan, only 275 stocks would meet the criteria.
Cho Chang-min, a researcher at Hyundai Motor Securities, noted, "The number of corporations expected to benefit from the separate taxation of dividend income is also expected to decrease compared to the criteria that investors had anticipated," and analyzed that "to justify the current valuation of the domestic stock market, the tax reform plan needs to be supplemented along with additional amendments to the Commercial Act and other policy momentum."
Especially for ETFs, even if the separate taxation of dividend income is implemented, there will be no direct tax benefits. The Ministry of Economy and Finance announced that collective investment schemes, such as ETFs, public and private funds, and REITs, are excluded from the separate taxation of dividend income. The rationale is that the goal of separate taxation is to encourage corporations to expand their dividends, which presents challenges in granting tax benefits to ETFs that do not have individual stocks providing incentives to increase dividends.
ETF distributions are subject to the dividend income tax at a rate of 15.4% (including local income tax).
Meanwhile, the ruling Democratic Party of Korea has begun an internal consultation process regarding the tax reform plan. On the 7th, an emergency discussion on the tax reform plan will be held, attended by Oh Gi-hyung, the head of the KOSPI 5000 special committee. Han Jeong-ae, chair of the Democratic Party's Policy Committee, stated, "We will communicate closely with the government and do our best to address concerns."