As the year-end approaches, domestic asset management companies are paying distributions on bond exchange-traded funds (ETFs). This follows a tax law revision announced in Jul. that changed the rules to require all ETFs, except domestic equity ETFs (passive products), to distribute interest and dividends revenue to investors.
In particular, because many bond ETFs had not paid distributions until now, some noted that investors should carefully check the new ex-distribution effects and whether they are subject to comprehensive taxation.
According to the securities industry on the 19th, Hana Asset Management on the 17th paid distributions of 455 won and 742 won per share, respectively, on four ETFs including the "1Q Money Market Active" ETF and the "1Q CD Rate Active" ETF. This is the first case of paying distributions on the company's bond ETFs that had not paid them. The source of this distribution is interest revenue generated from the bonds held by the ETFs from Jul. 1 of this year to the 12th of this month.
On the 28th of this month, Mirae Asset Global Investments will pay distributions on ETFs including "TIGER Short-term Monetary Stabilization Bonds," "TIGER Short-term Bonds Active," and "TIGER CD 1-year Rate Active," and Korea Investment Management will pay distributions on ETFs including "ACE Money Market Active" and "ACE Short-term Bond Alpha Active." Samsung Asset Management set the 15th of next month as the record date for distributions and will pay distributions on ETFs including "KODEX Comprehensive Bonds (AA- or higher) Active" and "KODEX 10-year Treasury Active." However, because distribution schedules can vary depending on the composition of the underlying assets, investors should check each manager's notices.
Until now, it was common for domestic bond ETFs not to distribute interest revenue to investors but to reinvest it within the fund. That was because they could keep rolling it without paying taxes and maximize the compounding effect.
The compounding effect refers to the phenomenon in which interest added to the initial principal is again added to the principal, causing interest revenue to snowball over time. Taxation also occurred only once, at the time of selling the ETF, making them popular in retirement accounts.
However, under the Enforcement Decree of the Income Tax Act revised in Jan. of this year, all funds except domestic equity ETFs must distribute interest and dividends revenue to investors at least once a year. There had been controversy over tax preferences because bond ETFs effectively had a structure allowing indefinite deferral of dividend income tax.
Accordingly, bond ETF investors began in earnest to experience ex-distribution effects this year. Ex-distribution means that when an ETF pays a distribution, its net asset value (NAV) falls by that amount, and the share price declines in tandem.
In addition, ETF distributions are treated as dividend income and taxed (15.4%) at the time of each payment. Also, when the combined total of interest income and dividend income exceeds 20 million won annually, it becomes subject to comprehensive taxation on financial income, so investors should check the changed tax structure.
A person at an asset management company said, "Because this is the first time some bond ETFs are paying distributions, we tried to finish the payments as much as possible before the year-end to prevent investor confusion," and advised, "Because the reinvestment effect will be smaller than before and ex-distribution will occur, be sure to check the distribution schedule when trading."