Investors pour 3 times more into overseas ETFs than domestic ones despite gov't push for 'productive ISA'

Even as the government unveiled a tax reform package on Aug. 3 designed to channel funds into the domestic stock market through a new “productive ISA” regime, money in the ETF market has been flowing into overseas equity products at a far faster pace than domestic ones. With the Kospi stuck in a sideways range, capital that had been concentrated in domestic equity ETFs since the start of the year is now shifting toward overseas assets.

According to ETF CHECK, net inflows into overseas equity ETFs over the past week reached 1.03 trillion won ($725 million) — nearly three times the 344.6 billion won that flowed into domestic equity ETFs over the same period.

This marks a reversal of the trend seen since the start of the year. Year-to-date net inflows into domestic equity ETFs stand at 4.9 trillion won, roughly 1.9 times the 2.56 trillion won that went into overseas equity ETFs — a reflection of the capital that poured into the Kospi during the earlier domestic market rally. But as the Kospi, which had climbed as high as 9,000 points, has since stalled in the 6,000-point range, short-term fund flows have reversed this month.

This month, ETF investment has been gravitating toward products tracking major US indexes. The top net inflow among domestically listed ETFs over the past week went to KODEX US NASDAQ 100, a product tracking the benchmark US index, with 303.4 billion won. TIGER US S&P 500 and TIGER US NASDAQ 100 drew 278.2 billion won and 203.7 billion won, respectively.

Overseas equity ETFs have long served as the primary vehicle for investing in foreign assets within the existing ISA framework. Because ISA accounts do not allow direct purchases of individual foreign stocks or ETFs listed on overseas exchanges, investors have relied on domestically listed overseas equity ETFs to gain foreign exposure while still benefiting from the ISA’s tax advantages. Although the government signaled on Aug. 3 that it would scale back existing ISA benefits as part of the productive ISA rollout, demand for overseas investment within the ETF market has actually expanded this month.

Within the existing ISA regime, domestically listed overseas ETFs already account for a share of assets comparable to domestic equities. According to the Korea Financial Investment Association’s ISA Damoa platform, overseas ETFs listed in Korea made up about 23 percent of total ISA assets under management as of the end of June — roughly on par with the approximately 22 percent share held by domestic equities, and actually ahead by about 50 billion won.

Regardless of the sustained demand for domestically listed overseas ETFs, the government is pressing ahead with the productive ISA to redirect funds that have largely flowed into foreign investments back toward the domestic market. Under the proposed regime, investors who put money into domestic stocks, equity ETFs and national growth funds would receive enhanced tax benefits, while investment in domestically listed overseas equity ETFs would be restricted. The fact that demand for such ETFs — the primary overseas investment tool within the existing ISA — has remained robust even after the policy overhaul was announced highlights the gap between the government’s vision and investor sentiment.

Industry observers say redirecting investor asset allocation simply by reshaping tax incentives will not be easy. “The policy objective is clear, but money follows investment appeal,” said Kang Jin-hyeok, a researcher at Shinhan Investment. “Tax benefits alone may not be enough to attract long-term capital inflows.”

With the domestic market continuing to trade sideways, analysts expect demand for overseas equity ETFs to remain difficult to suppress. “Some of the capital that left domestic assets appears to have moved into overseas assets,” said Jeon Gyun, a researcher at Samsung Securities. “As US equities have hit all-time highs and sustained a strong rally since the start of August, investment demand for overseas asset ETFs — centered on foreign stocks — has expanded.”

kacew@heraldcorp.com