🚨 Balancing Shareholder Return Policies and Liquidity Decline: Diversification Strategy with Exchange-Traded Funds

Today Korean Economic News | 2025.04.13

📌 20s and 30s Generation Turning Away from Korean Stock Market, Moving to US Market

💬 The participation rate of the 20s and 30s generation in the domestic stock market has been steadily declining. In 2021, investors in their 20s and 30s accounted for 14.9% and 20.9% respectively, but by 2024, these figures had dropped to 9.8% and 18.8%. Meanwhile, interest in the US stock market and cryptocurrency markets is rising, leading to aging investors and reduced liquidity in the Korean stock market. Financial experts point out that strengthening shareholder return policies of domestic companies and activating exchange-traded funds (ETFs) are necessary.

1️⃣ Easy Understanding

Young investors in their 20s and 30s are increasingly leaving the Korean stock market for the US stock market. Let me explain the causes, impacts, and solutions to this phenomenon in simple terms.

The 20s and 30s generation who became interested in stock investment during the COVID-19 pandemic in 2021 represented 35.8% of domestic stock investors at that time. However, their proportion has recently decreased significantly to 28.6%. In contrast, during the same period, the number of US stock accounts opened by this demographic has more than doubled.

The main reason young investors are leaving the domestic market is the difference in returns. Over the past three years, the KOSPI index has risen by only about 12%, while the US S&P 500 index has increased by about 35%. In particular, the explosive growth of global tech stocks such as Apple, Tesla, and Nvidia has attracted the attention of the 20s and 30s generation.

Another factor is the low dividends and shareholder return policies of Korean companies. The average dividend yield of Korean companies is about 2.1%, which is lower than the United States (2.8%) or Europe (3.5%). Even major stocks like Samsung Electronics and SK Hynix are criticized for paying lower dividends compared to their global competitors.

This phenomenon is leading to decreased liquidity in the domestic stock market. As young investors leave, market vitality decreases, which in turn becomes a limiting factor for stock price increases. Additionally, the aging investor base may strengthen risk-averse tendencies, potentially reducing investment in innovative companies.

Experts advise that to revitalize the stock market, Korean companies need to strengthen shareholder return policies, improve investment accessibility through exchange-traded funds (ETFs), and foster growth stocks by supporting innovative companies. Particularly, activating themed ETFs preferred by the 20s and 30s generation and tax-saving products like stock-type ISAs (Individual Savings Accounts) are emerging as important tasks.

2️⃣ Economic Terms

📕 Shareholder Return Policy

A shareholder return policy is a policy that returns profits created by a company to its shareholders, mainly in the form of dividends and share buybacks.

• Dividends are a method of paying cash directly to shareholders, while share buybacks involve purchasing company's own shares from the market to reduce the number of outstanding shares, thereby increasing value per share.
• A company's shareholder return policy is directly linked to its investment attractiveness and plays an important role in attracting long-term investors.

📕 Liquidity

Liquidity refers to the ease with which an asset can be converted into cash, and in the stock market, it indicates the level of active trading.

• A market with high liquidity has small price differences between buy and sell orders (spreads), and large transactions do not cause significant price changes.
• Decreased market liquidity can lead to problems such as increased price volatility, higher investment risk, and increased capital raising costs.

📕 Exchange-Traded Fund (ETF)

An Exchange-Traded Fund (ETF) is an investment product designed to track the performance of a specific index or asset, and can be traded on exchanges like stocks.

• It allows diversified investment across various stocks, reducing individual stock risk, and has the advantage of low operating costs.
• There are various types, including market index, sector, thematic, and bond ETFs, allowing investors to choose according to their objectives.

📕 MZ Generation Investment Trends

The MZ generation (Millennials + Generation Z), as digital natives, show unique investment tendencies including mobile platform investment, thematic investment, and emphasis on ESG values.

• They prioritize future growth potential and innovation over short-term returns, and have high interest in platform and new technology companies.
• They prefer new investment methods such as 'fractional investing' starting with small amounts, information sharing through social media, and new investment vehicles like IPOs and crowdfunding.

3️⃣ Principles and Economic Outlook

💡 Analysis of the 20s and 30s Generation's Exodus from the Domestic Stock Market and Its Causes

• Let's analyze the causes and impacts of young investors leaving the Korean stock market for overseas markets.

  • First, the return gap is the biggest factor. Over the past three years, the KOSPI index has risen by only about 12%, while the US S&P 500 index has risen by about 35% and the Nasdaq index by more than 40%. The strong performance of technology stocks such as Tesla, Apple, and Nvidia, which are preferred by young investors, has been particularly notable. While Samsung Electronics and SK Hynix have shown strength in the domestic market due to the recovery in the semiconductor industry, they have not matched the growth of US technology stocks. According to an analysis by Korea Investment & Securities, 73% of overseas stock investors in their 20s and 30s cited 'higher returns' as the reason for investing abroad. In particular, the concentration on large-cap stocks in the domestic market and the absence of small and mid-cap growth stocks are factors that diminish young investors' interest.

  • Second, differences in shareholder return policies are also a significant factor. The average dividend yield of Korean companies is about 2.1%, which is lower than the United States (2.8%) or Europe (3.5%). Share buybacks and cancellations are also less aggressive compared to US companies. In 2024, the total amount of dividends paid by domestic companies was about 51 trillion won, an increase of 5% from the previous year, but this is lower than the growth rate of global companies. Particularly in the case of Samsung Electronics, despite having cash assets of about 120 trillion won, its dividend yield is less than 2%, lower than Apple (2.5%) or Microsoft (2.7%). These lower shareholder return policies decrease long-term investment attractiveness and accelerate the exodus of young investors who prioritize returns.

  • Third, differences in investment accessibility and trends are also having an impact. The US stock market allows fractional trading and has fee-free platforms like Robinhood, making it easier for small investors to access. Additionally, themed ETFs are diversely developed, allowing easy investment in specific industries or trends. In contrast, the domestic market has relatively large minimum order units and fee burdens, and limited themed investment products. Also, since there are few innovative companies in areas of interest to the 20s and 30s generation such as renewable energy, AI, and space industry in the domestic market, they have no choice but to choose overseas markets to invest in these fields. According to a survey by the Korea Exchange, 82% of investors in their 20s and 30s cited 'diverse investment opportunities' as an advantage of overseas investment.

• The exodus of the 20s and 30s generation from the domestic stock market can be seen as a structural problem rather than a temporary phenomenon. It's the result of a combination of return gaps, differences in shareholder return policies, and differences in investment trends and accessibility. This leads to decreased liquidity and aging in the domestic stock market, which can be a factor limiting market vitality and growth potential in the medium to long term. To revitalize the stock market, it is necessary to spread a corporate culture centered on shareholder value, nurture innovative companies, and create a market environment friendly to small investors.

💡 The Balance Between Strengthening Shareholder Return Policies and Securing Market Liquidity

• Let's examine why strengthening shareholder return policies of domestic companies is necessary and how this affects market liquidity.

  • First, strengthening shareholder return policies contributes to enhancing corporate value. Appropriate dividends and share buybacks provide stable returns to shareholders, which helps attract long-term investors. According to global research, companies with high dividend growth rates tend to record higher returns than the market average in the long term. In particular, Korean large corporations tend to have high retention rates apart from facility investment and R&D, despite having abundant cash. The dividend payout ratios (dividends as a percentage of net profit) of major companies such as Samsung Electronics, SK Hynix, and Hyundai Motor are at 20-30% levels, which is lower than their global competitors' 40-50%. Strengthening shareholder return policies can help reduce the valuation discount (Korea discount) of these companies.

  • Second, however, excessive shareholder returns should be balanced with growth investments. If too much capital is devoted to dividends and share buybacks, investments for future growth may be curtailed. Especially in industries such as semiconductors, batteries, and biotechnology that require large-scale facility investments and R&D, the balance between growth investment and shareholder returns is important. Also, if share buybacks aim only for short-term stock price support, they may not help enhance long-term corporate value. Shareholder return policies should be predictable and sustainable, not one-time events, to give investors confidence. According to Financial Supervisory Service data, companies with clear and consistent shareholder return policies have an average P/E ratio (Price-to-Earnings ratio) 15% higher than those without such policies.

  • Third, securing market liquidity and shareholder returns can have a complementary relationship. Generally, share buybacks can negatively impact short-term market liquidity by reducing the number of outstanding shares. However, in the long term, appropriate shareholder return policies can increase investment attractiveness, attract new investors, and this can lead to improved market liquidity. Particularly, young investors like the 20s and 30s generation tend to value stable returns (dividends) as well as growth potential, so balanced shareholder return policies can promote their inflow. According to a survey by a major securities firm, 62% of investors in their 20s and 30s cited 'stable dividends' as an important consideration when investing in domestic stocks.

• Strengthening shareholder return policies of domestic companies is necessary to enhance investor confidence and revitalize the market, but it should not be done at the expense of future growth investments. Companies should establish clear and consistent shareholder return principles and pursue long-term corporate value maximization through a balance with growth investments. Particularly from a market liquidity perspective, stable dividend growth is more important than simple share buybacks, and this can contribute to encouraging the participation of various investor groups, including the 20s and 30s generation, in the long term.

💡 Investment Strategy Using Exchange-Traded Funds (ETFs)

• Let's explore how Exchange-Traded Funds (ETFs) can improve investment accessibility and promote the participation of the 20s and 30s generation in the domestic stock market.

  • First, ETFs are an efficient means of diversified investment and thematic investment. ETFs are products that track an index or specific theme, allowing diversified investment in the entire market or a specific industry without the burden of individual stock selection. Especially for the 20s and 30s generation with little investment experience, ETFs are a good entry product that allows market participation while reducing risk. Recently, themed ETFs focusing on areas that young generations are interested in, such as AI, robotics, metaverse, and eco-friendly energy, have been increasing. As of 2024, the size of the domestic ETF market is about 80 trillion won, which has grown by more than 60% compared to 2021. However, compared to the US ETF market (about 8 trillion dollars), there is still room for development. In particular, the proportion of themed ETFs is about 15% in Korea, which is lower than the US (30%).

  • Second, ETFs can improve accessibility to global investment. Direct investment in foreign stocks has difficulties such as exchange rate risk, tax issues, and information accessibility. ETFs listed domestically that track foreign indexes or global themes lower these barriers, allowing domestic investors to easily invest in global markets with the Korean won. For example, through ETFs tracking the US S&P 500 index or Nasdaq index, it's easier to track the returns of the US market domestically. This can be an alternative for the 20s and 30s generation to gain global investment opportunities through the domestic stock market. According to the Korea Exchange, the trading volume of ETFs linked to overseas indices increased by 45% year-on-year in 2024, with the proportion of the 20s and 30s generation being particularly high.

  • Third, institutional support and product diversification are needed to activate ETFs. To activate ETF investment, institutional support such as tax benefits, relaxation of retirement pension investment restrictions, and expansion of investment education is necessary. Tax benefits to encourage long-term asset formation using ETFs and links with products like ISA (Individual Savings Account) are particularly important. Also, the development of themed ETFs reflecting the interests of the 20s and 30s generation such as ESG (Environmental, Social, Governance), digital innovation, healthcare, and the introduction of new forms of products like active ETFs are necessary. The Financial Services Commission recently announced ETF market diversification and expansion of tax support as major policies in its 'Capital Market Activation Plan', which is expected to help attract the 20s and 30s generation to participate in the stock market.

• Exchange-Traded Funds (ETFs) are an efficient tool that can meet various investment needs such as diversified investment, thematic investment, and global investment. Especially for the 20s and 30s generation with little investment experience, ETFs can be a good alternative to participate in the market while managing risk. Various efforts such as product diversification, tax support, and investment education are needed to activate the ETF market. Through this, it's necessary to increase liquidity in the domestic stock market and create an environment where the 20s and 30s generation can find global investment opportunities in the domestic market without leaking overseas.

4️⃣ In Conclusion

The exodus of the 20s and 30s generation from the domestic stock market signals the structural problems of the Korean stock market and suggests the need for change to revitalize the market. As the returns of the KOSPI index have significantly lagged behind major US indices over the past three years, young investors are turning to overseas markets in search of higher returns. If this trend continues, there are concerns about decreased liquidity in the domestic stock market and reduced vitality due to aging.

To solve these problems, domestic companies need to strengthen their shareholder return policies. They need to enhance corporate value and return more value to investors through expanded dividends and share buybacks and cancellations. However, this should be balanced with investments for future growth and should be done in a sustainable form, not a one-time event.

Improving investment accessibility through Exchange-Traded Funds (ETFs) is also an important task. ETFs are an efficient means of diversified investment and thematic investment, suitable for the 20s and 30s generation with little investment experience. In particular, global investment opportunities can be provided domestically through ETFs tracking global indices or themes.

For the long-term development of the domestic stock market, it is also necessary to activate innovative company listings and expand the venture ecosystem. An environment should be created where companies in future industry fields that the 20s and 30s generation are interested in can grow in the domestic market. Also, improving accessibility through the introduction of fractional trading for small investors, reducing fees, and expanding tax benefits is important.

In the end, to prevent the exodus of the 20s and 30s generation and revitalize the domestic stock market, a comprehensive approach including the spread of a corporate culture centered on shareholder value, the development of various investment products, and the nurturing of innovative companies is needed. In particular, finding the balance point between shareholder return policies, market liquidity, and growth investments will be a key task. Through this, the domestic stock market can become an attractive investment target for the younger generation and develop into a market with global competitiveness.