As the domestic exchange-traded fund (ETF) market grows, the lineup of products tracking foreign stock indices is expanding. However, a substantial number of investors are directly investing in overseas-listed ETFs, despite the higher commission burden. Analysts attribute this to tax differences and product diversity.
According to the Korea Securities Depository (KSD) on the 23rd, domestic investors purchased a net amount of $742 million (approximately 1 trillion won) in the U.S. dividend stock ETF 'SCHD' as of the 21st of this month. This was the third-largest net purchase among overseas stocks.
There are several domestic versions of SCHD. Representative examples include Samsung Asset Management's 'KODEX U.S. Dividend Dow Jones', Mirae Asset Global Investments' 'TIGER U.S. Dividend Dow Jones', Korea Investment Management's 'ACE U.S. Dividend Dow Jones', and Shinhan Asset Management's 'SOL U.S. Dividend Dow Jones'. Although they are popular enough to have nicknames like 'Komi-dang' and 'Tami-dang', the net purchase amount of individuals this year is about 415 billion won for the combined 4 ETFs, which falls short of the direct net purchase amount of SCHD.
Domestic investors have also net purchased over $500 million (approximately 700 billion won) each in ETFs like 'VOO', which tracks the Standard & Poor's (S&P) 500 index, and 'SGOV', which invests in U.S. government bonds with maturities of less than three months.
As of the end of June this year, the holdings of overseas-listed ETFs by domestic investors amount to approximately 50 trillion won. Although the total size of overseas ETFs listed domestically is larger at 77 trillion won, experts explain that this phenomenon arises from the existence of retirement accounts that can only hold domestic listed ETFs. The recent trend indicates that there is significant demand for direct investment in overseas ETFs, even for ETFs that have identical products.
Kim Min-ki, a researcher at the Capital Market Research Institute, noted, 'Despite the rapid growth of overseas ETFs listed in Korea in recent years, it seems that domestic investors have continued to trade ETFs listed on foreign exchanges as well.'
As domestic asset management firms engage in a competition to lower fees, domestic listed overseas ETFs are advantageous in terms of management fees alone. For instance, the total fee rate for domestic listed ETFs tracking the S&P 500 index is around 0.006%. In contrast, the total fee rates for similar overseas listed ETFs like 'VOO (0.03%)', 'SPY (0.0945%)', and 'IVV (0.03%)' are relatively higher. However, considering various hidden costs in domestic listed overseas ETFs, it is argued that they are not significantly advantageous.
'Whether to include financial income in the comprehensive taxation' is cited as one of the reasons for directly investing in overseas-listed ETFs. According to current tax law, overseas-listed ETFs are subject to the same dividend income tax rate of 15.4% (including local income tax) as domestic ETFs, while capital gains are taxed at the same rate as foreign stocks (22%). The capital gains are not included in the comprehensive taxation of financial income and are taxed separately.
In contrast, overseas-listed ETFs in Korea are classified as trust-type funds under tax law, making both capital gains and dividends subject to the dividend income tax (15.4%). Although the tax rate itself is lower than that of capital gains tax, the issue lies in the comprehensive taxation of financial income. The dividend income tax is combined into the comprehensive taxation of financial income, which imposes a progressive tax rate that can reach up to 49.5% for annual financial income exceeding 20 million won.
Consequently, there is a tendency for high-income investors with significant financial income to prefer overseas-listed ETFs. Researcher Kim stated, 'It has been analyzed that investor groups with more considerable holdings have a higher proportion of overseas-listed ETF holdings', adding that 'the tax advantages primarily stimulate the demand of high-net-worth individuals for tax savings, resulting in funds flowing into overseas-listed ETFs.'
Product diversity is also a factor. In Korea, the tracking multiplier for leveraged and inverse products is limited to twice, and the weight of a single stock within the underlying index cannot exceed 30%. As a result, high-multiplier leveraged and inverse ETFs for individual stocks are practically impossible. In contrast, the overseas market has a variety of high-multiplier derivative ETFs and single-stock tracking ETFs.
According to the Capital Market Research Institute, of the overseas listed derivative ETFs that domestic investors traded in the first half of this year, 39% were two times leveraged products and 33% were three times products, accounting for 72% of the total. For Korean investors seeking high risk and high returns, overseas-listed ETFs appear to be a better option than domestic listed ETFs.
Even leveraged products based on Samsung Electronics were introduced overseas first. Earlier, Hong Kong's CSOP Asset Management listed a leveraged and inverse product based on a single stock of Samsung Electronics on the Hong Kong stock exchange in May.
There are also concerns about the chronic issue of 'copying products' among domestic asset management firms, but the industry expresses that there are realistic limits. An executive from a mid-sized asset management company stated, 'It is not easy for new types of ETFs or somewhat aggressive ETFs to get through the thresholds of financial authorities and the Korea Exchange.'