"Samsung Electronics CAP Abolition Removes Passive Fund Outflow Risk"

Yujin Investment & Securities "Resolved 540 Billion KRW Scale Capital Outflow Risk"

[Asia Economy Reporter Minji Lee] There is an opinion that the risk of passive fund outflows amounting to approximately 540 billion KRW could be resolved with the abolition of the market capitalization weight cap system (CAP system), which limits Samsung Electronics' market capitalization weight to 30%.

According to the Korea Exchange on the 6th, after collecting opinions on the improvement plan for the CAP system related to the calculation of the KOSPI 200 index and KRX 300 index by the 22nd, the Index Management Committee will review and revise the index calculation methodology.

The Exchange expects that the CAP will not be applied to domestic indices, considering environmental changes such as the relaxation of regulations related to domestic fund management. According to the revised enforcement rules of the Financial Investment Services and Capital Markets Act, which came into effect on the 1st, the physical weight of a specific stock in ETFs and index funds tracking a particular index may exceed 30%.

Dongwan Kim, a researcher at Eugene Investment & Securities, said, "With the revision of the Financial Investment Services and Capital Markets Act, ETFs and index funds that have held futures positions for Samsung Electronics exceeding 30% in the KOSPI 200 will prefer physical stocks over futures, which require rollover costs and margin management."

For overseas indices, a parallel calculation method of the overseas KOSPI 200 index with CAP applied is expected to be implemented to promote Korean investment by foreign investors. Considering the absolute size of Samsung Electronics' market capitalization in the domestic stock market and Samsung Electronics' weight in MSCI KOREA, a CAP of around 20-25% is expected to be applied to the overseas index.

Researcher Kim said, "Most major overseas indices generally apply CAPs in the range of 10-20%, but considering the absolute size of Samsung Electronics' market capitalization in the domestic stock market and Samsung Electronics' weight of about 22% in MSCI KOREA, a representative benchmark index for foreigners, it is expected that an overseas index with a relaxed CAP of 20-25% will be calculated in parallel."

If the CAP is abolished, the risk of passive fund outflows of Samsung Electronics, which accounts for about 33% of the KOSPI 200 index, is expected to disappear. Assuming the size of ETF funds tracking the KOSPI 200 is about 18 trillion KRW, the expected selling amount of Samsung Electronics is approximately 540 billion KRW combined in cash and futures, which corresponds to about 41% of Samsung Electronics' average daily trading volume of common shares this year.