[Financial Planning for the 100-Year Life] Overheated KOSPI: Time to Restore Balance with ETFs

As of the end of October this year, the KOSPI had risen by 71.2%. During the same period, the MSCI (Morgan Stanley Capital International) World Index increased by only 19.6%. Among major global markets, the Korean stock market's growth rate is by far the highest. However, the majority of individual investors' returns are likely to fall far short of the KOSPI's gains.

The biggest reason is the disparity in growth rates among different sectors. Looking at the sectoral gains in the KOSPI this year, machinery (165.3%), electrical and electronics (111.8%), and transportation equipment (84.8%) have driven stock prices upward. In contrast, sectors such as telecommunications (9.6%), transportation and warehousing (16.9%), and chemicals (38.2%) have significantly underperformed the index's rise. Only a few sectors, such as semiconductors and shipbuilding, have lifted the overall index, while many sectors remain sluggish. Individual investors, with limited access to information and analytical capabilities, find it difficult to generate returns in such a differentiated market.

In such situations, investing in index-based Exchange-Traded Funds (ETFs) is more rational than picking individual stocks. ETFs, which are composed of representative stocks like those in the KOSPI200, help mitigate sectoral disparities and allow investors to reliably track the market's average return. For individual investors, who face significant information asymmetry, ETFs offer three simultaneous advantages: low cost, high transparency, and diversification. Additionally, ETFs can be traded in real time and offer a variety of theme and sector-based products, enabling investors to manage overall market risk efficiently on their own. For those who believe in the long-term trends of an industry, sector-based ETFs focused on industry leaders, such as semiconductor ETFs, are also a good choice.

The problem is that the current level of the KOSPI is excessively high. Over the long term, the KOSPI has risen at a pace slightly above nominal Gross Domestic Product (GDP). From 2000 to 2024, nominal GDP grew at an average annual rate of 5.9%, while the KOSPI increased by 6.7%. Based on this ratio, if GDP grows by 3.6% in 2025, a reasonable KOSPI level would be 3,288; with 4.3% growth in 2026, the level would be about 3,466. However, the current index exceeds 4,000, which is more than 20% above the theoretical value.

Liquidity indicators also point to overheating. The ratio of the KOSPI's market capitalization to broad money supply (M2) is estimated at 75.6% as of October this year, which is 18.1 percentage points higher than the 2005-2024 average of 57.5%. In contrast, the proportion of customer deposits and domestic equity funds relative to the KOSPI's market capitalization is 8.2%, lower than the long-term average of 9.6%. While market capitalization has expanded rapidly, the liquidity actually available to purchase stocks is insufficient.

There is also a significant disconnect with exports. Since 2005, the correlation coefficient between daily average export value and the KOSPI has been very high at 0.87. However, as of the end of October, the KOSPI is about 33% higher than the level implied by export indicators. Although the semiconductor industry is recovering, the pace of export growth still falls short of keeping up with the rise in stock prices.

Recently, the balance of margin loans exceeded 2.58 trillion won, reaching an all-time high. This is particularly concentrated in certain sectors such as semiconductors. If foreign capital were to leave the market due to exchange rate fluctuations or deteriorating external conditions, market volatility could increase even further.

Of course, overheating does not immediately mean a collapse. Ample liquidity and optimistic expectations can support stock prices for a certain period. However, it appears inevitable that the index will enter a correction phase for the remainder of the year. In the short term, a portfolio focused on undervalued value stocks or high-dividend stocks is more advantageous than one centered on overvalued growth stocks.

Dividend-type ETFs are especially useful during market corrections. Many such products, which offer stable cash flow and a defensive nature, are listed. Since they are composed of companies with low price-to-earnings ratios and consistent dividends, they serve as a buffer in volatile markets. Although dividend income accumulates more slowly than short-term capital gains, its consistency becomes a safety net for assets during times of heightened uncertainty.

Ultimately, now is the time to restore balance rather than chase rapid gains. What individual investors need is not more "information," but better "structure." ETFs offer the most efficient means of providing structural stability and transparency. Rather than being swept up in short-term overheating, it is more important than ever to take a systematic, diversified approach through ETFs and maintain a cool-headed focus on economic fundamentals.