As the season for submitting audit reports arrives, corporations that have delayed filing reports or triggered delisting grounds are being designated one after another as management or investment caution items. As a result, vacancies emerged among components of benchmark indexes such as the KOSDAQ 150, and newly added stocks are filling those spots and enjoying unexpected gains.
When a stock is added to a benchmark index, passive funds that track the index flow in according to weight, becoming a driver for share price gains. In particular, with the launch this month of an active exchange-traded fund (ETF) that tracks the KOSDAQ 150 index, inflows have expanded and the index inclusion effect has grown, analysts said.
According to the Korea Exchange (KRX) on the 25th, HYUNDAI HYMS, a ship equipment corporations, and SELVAS AI, an artificial intelligence (AI) voice technology specialist corporations, are slated to be newly added to the KOSDAQ 150 and two related indexes on the 26th and 27th, respectively.
This is because HIGEN RNM, an industrial motor specialist corporations, and UTI, a smartphone parts company, were removed from the index after being designated as investment caution items. Earlier, on the 20th, Mezzion Pharma, a cardiovascular new drug corporations, was dropped from the KOSDAQ 150 for the same reason, and Curiox Biosystems, a cell analysis process automation equipment corporations, was newly added.
Under current rules, even if certain conditions are met, components of the KOSDAQ 150 are excluded from consideration if they are designated as management, caution or liquidation-only trading items. HIGEN RNM was designated an investment caution item on the 23rd for receiving a non-unqualified opinion on its internal accounting control system from an external audit, and UTI was designated on the 24th for having operating losses for five consecutive fiscal years. If similar cases emerge, additional ad-hoc index changes may follow.
SELVAS AI was excluded from the KOSDAQ 150 index when Aimed Bio, which met special inclusion criteria for newly listed stocks, was added on the 13th, but was re-included in about two weeks due to UTI's removal. The estimated rebalancing buy demand for SELVAS AI is about 16.2 billion won, which is 2.7 times the average daily transaction value during the month before the inclusion announcement (Feb. 24–Mar. 23).
Stocks added to the index typically saw short-term share price gains around the announcement. Earlier, Curiox Biosystems' share price jumped 55% over two days (the 17th–18th) immediately after the related announcement. At the time, expectations for inclusion in the Financial Times Stock Exchange (FTSE) index added momentum, with foreigners and institutions net buying 38.6 billion won and 25.5 billion won, respectively.
HYUNDAI HYMS also gained 24% through the previous day after the inclusion announcement on the 23rd. During this period, foreigners and institutions were net buyers of 3.8 billion won and 1.4 billion won, while individuals were net sellers of 5.0 billion won. Rebalancing demand for HYUNDAI HYMS is estimated at 18.0 billion won, 2.5 times the average daily transaction value (7.3 billion won) in the month before the announcement.
By contrast, stocks removed from the index weakened as institutional funds flowed out. In March last year, HLB Life Science saw institutional selling of 16.0 billion won for six consecutive trading days after the removal announcement, and the share price plunged 23%.
With the expansion of the ETF market, index inclusion itself is becoming a major short-term event, analysts say. Ko Gyeong-beom, a researcher at Yuanta Securities Korea, said, "With the growth of KOSDAQ ETFs, funds tracking the KOSDAQ 150 have increased to about 14.7 trillion won," adding that they are "the main players driving KOSDAQ supply and demand."
Ko added, "It is necessary to approach by distinguishing the flow effects of stocks included in the (KOSDAQ 150) and active strategies for non-included stocks."