An increasing number of retail investors are returning to the U.S. stock market, forgoing tax benefits and even paying penalty taxes to do so. The Returning Investment Account (RIA), introduced by the government to draw overseas stock investment funds back home, has faced fund outflows just four months after its launch.
According to the Korea Financial Investment Association on the 6th, total RIA account balances stood at 2.1214 trillion won as of the 31st of last month. The balance, which exceeded 2.6 trillion won at the end of May, fell by about 500 billion won in two months. This marks the first monthly decline in the balance since the system took effect on March 23.
The RIA is a program that deducts overseas stock capital gains taxes when proceeds from selling overseas stocks are reinvested in domestic listed stocks or equity funds. However, to receive the tax benefits, investors must keep their funds in place for at least one year.
Experts say the domestic stock market's recent high volatility and the one-year mandatory holding requirement are weighing on investors.
Indeed, in July the KOSPI plunged more than 20% in a single month, while the U.S. Nasdaq index fell only about 2%. As concerns grew that funds could be tied up in the domestic market and suffer losses in an attempt to save on capital gains taxes, investors are interpreted to be closing their accounts even at the cost of tax benefits and penalty tax burdens.
The exodus from the domestic market is confirmed by other indicators as well. From June, when the domestic market's correction began in earnest, through the end of July, retail investors' net purchases of U.S. stocks reached $5.27537 billion (about 8 trillion won). Meanwhile, investor deposits—funds waiting to enter the domestic market—fell from about 139 trillion won in early June to around 104 trillion won at the end of July, a 35 trillion won drop in two months.
There was even a phenomenon of investing in Korea-related products listed on the U.S. stock market, bearing capital gains tax burdens. Among the top net purchases by "Seohak ants" last month, SK Hynix's American Depositary Receipts (ADR) ranked second, and "KORU," a leveraged exchange-traded fund (ETF) that tracks the Korean market at three times, ranked fifth.
Amid this trend, total RIA account balances at the end of last month amounted to just 0.9% of domestic investors' U.S. stock holdings valuation (about 243 trillion won). New account sign-ups also plunged from 88,000 in May to 14,400 in July, leading to assessments that the program is effectively losing momentum.
Kim Dae-jong, a professor at Sejong University, said, "Combined with uncertainty in the domestic market, the RIA account's liquidity constraints led to fund outflows by investors." He added, "For the RIA to establish itself as a sustainable program, institutional flexibility must be increased, such as easing the mandatory holding period and strengthening tax incentives."
