The Lead of the Snake, Not the Tail of the Dragon: March KOSPI and KOSDAQ Size Regular Changes

Inflows of Index-Tracking (Passive) Funds into Newly Added Stocks
From Large-Cap to Mid-Cap...Selective Approach to Investment Stocks and Timing

[Asia Economy Reporter Lee Seon-ae] Interest is growing in the stocks subject to the regular index rebalancing of the KOSPI and KOSDAQ market capitalization size indices (large, mid, small caps) by the Korea Exchange in March. Since passive funds tracking the index flow into newly included stocks, an investment strategy has been suggested emphasizing the need to pay attention to the replacement stocks.

According to the Korea Exchange on the 2nd, the regular rebalancing of the KOSPI and KOSDAQ size indices will take place on the 12th, the next trading day after the March futures expiration date. The size indices classify listed stocks by market capitalization into large, mid, and small caps. The KOSPI large-cap index includes stocks ranked 1st to 100th by market capitalization, the mid-cap index includes those ranked 101st to 300th, and the small-cap index includes those ranked 301st and below. The KOSDAQ large-cap index includes stocks ranked 1st to 100th, the mid-cap index includes those ranked 101st to 400th, and the small-cap index includes those ranked 401st and below.

Attention should be paid to stocks moving from large-cap to mid-cap and from mid-cap to large-cap during the KOSPI stock replacement period. Reviewing 11 size index changes from 2010 to 2020, stocks moving from large-cap to mid-cap tended to outperform the KOSPI (measured by returns from early February to the index change date), while stocks moving from mid-cap to large-cap tended to underperform the KOSPI. This phenomenon occurs because stocks moving from the lower ranks of the large-cap index to the upper ranks of the mid-cap index can expect buying demand from mid- and small-cap fund managers. Conversely, stocks moving from mid-cap to large-cap move to the lower ranks of the large-cap index, which may temporarily cause a supply shortage. Kang Song-cheol, a researcher at Shinhan Financial Investment, said, "Considering the large investment scale in mid- and small-caps, it is advantageous from a supply-demand perspective if a stock included in the large-cap group changes to mid-cap. However, it is necessary to selectively approach the choice of stocks and timing rather than simply buying all stocks expected to move from large-cap to mid-cap in advance."

Stocks moving from large-cap to mid-cap are like "the tail of the dragon" becoming "the head of the snake." Looking at cases from 2010 to 2020, among these stocks (large to mid), those with smaller market capitalization (below the top 75%) showed better investment returns (from early February to the change date). In this upcoming size index rebalancing, four stocks expected to move from large-cap to mid-cap and fall below the top 75% by market capitalization are POSCO International, Hyundai Marine & Fire Insurance, BNK Financial Group, and KCC. Additionally, stocks moving from small-cap to mid-cap with smaller market capitalization (below the top 75%) outperformed the KOSPI by 5.1 percentage points when invested from early February to the size index change date (2010?2020). These stocks include Haesung DS, Samsung Pharm, Hanwha General Insurance, Hyundai Energy Solutions, and Handok. Researcher Kang advised, "It is necessary to pay attention to stocks moving to the mid-cap index until the size index change date and to those moving to the large-cap index after the change date."

Lee Jung-yeon, a researcher at Meritz Securities, also said, "Due to increased net buying pressure from institutional investors on stocks moving from large-cap to mid-cap, this group recorded excess returns compared to the KOSPI in 7 out of 11 cases. The supply-demand effect of this moving stock group remains valid."

Attention should also be paid to KOSDAQ stock replacements. Stocks that have fallen in market capitalization rankings from the existing KOSDAQ large-cap group are moving to mid-cap, with Huons and Patron expected to be among them. Jeon Gyun, a researcher at Samsung Securities, emphasized, "From the perspective of institutional investors such as pension funds and asset management companies, KOSPI mid-caps and KOSDAQ large-caps belong to the 'mid-cap investment universe' for active management, so they deserve attention. The stocks subject to rebalancing by institutional investors are those upgraded from small-cap to mid-cap (KOSPI mid-cap) or moving from mid-cap to large-cap (KOSDAQ large-cap)."

This content was produced with the assistance of AI translation services.