Focus on Value-Up Mid-Small Caps for Inclusion... "Index Boost Effect Not Expected to Be Significant"

In the securities industry, the effect of boosting the index due to the release of the 'Korea Value-Up Index' is expected to be limited. The stock market boost effect from large-cap stocks such as Hyundai Motor has already been reflected in the first half of the year, and although stocks likely to be newly included in the Value-Up Index among small and mid-cap stocks are expected to see price increases, their market capitalization is not large enough to significantly raise the index.

The 2nd seminar on support measures for corporate value-up to boost the Korean stock market was held on the 2nd at the Korea Exchange. Jung Eun-bo, Chairman of the Korea Exchange, is delivering a greeting. Photo by Younghan Heo younghan@

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On the 24th, a notable aspect of the 'Korea Value-Up Index' released by the Korea Exchange was its stock composition. To prevent concentration of stocks, the exchange selected representative stocks evenly across all industry sectors. In the case of Japan's JPX PRIME 150, the components were selected based on a dual criterion of 75 stocks with excellent capital efficiency and the top 75 stocks by market capitalization among companies with excellent market evaluations.

Thanks to the balanced inclusion of all industry sectors, the index's volatility is expected to be low. In terms of returns, the Value-Up Index showed better performance compared to existing market representative indices. According to the Korea Exchange, comparing the period returns of the Value-Up Index and market representative indices over the past five years showed △Value-Up Index 43.5%, △KOSPI 200 33.7%, and △KRX 300 34.3%.

Baek Jae-wook, CEO of Daishin Economic Research Institute, analyzed, "If the index components are concentrated in specific industries, the performance of individual sectors may significantly decline in certain market phases, affecting performance volatility. Also, while Japan selected stocks based on absolute evaluation criteria such as price-to-book ratio (PBR), the Korea Value-Up Index applied various evaluation indicators, particularly using return on equity (ROE) as the most important criterion."

The diversity of evaluation indicators is another point of difference from Japan, which is a predecessor in Value-Up indices. In Japan, excluding industry characteristics and mainly applying PBR and ROE criteria led to some sectors (banks) and representative companies like Toyota being excluded from the index. Due to poor index performance, Japan included representative stocks such as Toyota in the regular revision last August.

Lee Hyung-jun, team leader of the Index Business Department at the Korea Exchange's Management Support Headquarters, explained, "Japan focused heavily on the purpose of the Value-Up program when creating the index and implemented policy objectives well. However, this resulted in the exclusion of representative stocks, and ultimately the returns failed to keep up with the index. Taking Japan's case into account, we considered industry weight and inclusion of representative stocks when composing the Value-Up Index and decided to include Samsung Electronics."

Another difference from existing representative indices is the limit on the maximum weight of individual stocks within the index, capped at 15%. Existing market representative indices such as KOSPI 200 do not apply a weight cap system, which often caused the index to fluctuate according to the stock prices of large-cap stocks like Samsung Electronics and SK Hynix.

A Korea Exchange official said, "To avoid an index swayed by specific stocks, we included representative companies but carefully considered not to increase their weight excessively. Although there may be cases where the Value-Up Index does not outperform the market when Samsung Electronics' stock price leads the market, we decided to apply the weight cap system to prevent the index from becoming one for specific stocks."

The market expects the index boost effect from the Value-Up Index announcement to be limited. Jo Jae-woon, a researcher at Daishin Securities, said, "The stock market boost effect from large-cap stocks has already been pre-reflected since February 2024, so additional boost effects are expected to be limited. While stock price increases are expected if previously undiscovered mid-cap stocks are added to the Value-Up Index, considering their market capitalization, the overall index boost effect is limited."

Advice has emerged to focus on small and mid-cap value stocks rather than large caps. Park So-yeon, a researcher at Shin Young Securities, said, "In the first half of the year, the Value-Up rally centered on large value stocks such as banks and automobiles, but recently it has been spreading to small and mid-cap value stocks. This may be partly due to an increase in companies with management disputes such as Korea Zinc, T'way Air, and FnGuide, but the announcement of the Value-Up Index and the increase in corporate value enhancement disclosures are signs of demand spreading across value stocks."

Daishin Securities identified IT, healthcare, and energy as leading sectors. Researcher Jo Jae-woon said, "Financials, consumer discretionary (automobiles), and industrials (holding companies), which were representative undervalued stocks with large pre-reflection, may decline after the index announcement. If a sector quota system is implemented, sectors like IT, healthcare, and energy, which were previously distant from Value-Up expectations, may be included and lead the rise of the Value-Up Index."

Short-term capital inflow effects are expected to be limited. A financial investment industry official said, "Since the index incorporates Value-Up elements while avoiding divergence from the market, it can be seen as a hybrid product, but hybrid products are generally not preferred in the market. How well marketing is done and whether early performance is good will be key factors in determining whether it establishes itself as a market representative index."

Yeom Dong-chan, a researcher at Korea Investment & Securities, said, "Even after the Value-Up Index release, it takes 2-3 months until ETF establishment, and the performance of Japan's Value-Up Index was not better than the Nikkei 225. It should be remembered that capital inflow into Value-Up ETFs was not significant."

Researcher Jo Jae-woon said, "If the Value-Up Index's returns do not outperform the benchmark (KOSPI or KOSPI 200), natural capital inflow will not be significant. In such cases, pension funds are expected to play a key role."

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