In the KOSPI 200, large blue-chip stocks led by semiconductor makers account for most of the index's market value and earnings. Buying the index is close to buying the core companies of the Korean economy. The KOSDAQ 150 is a different animal. It brings together a wide range of companies at different stages of growth. Some generate steady profits, while others are held up by nothing more than expectations of future earnings growth.
Looking at the market-value weightings of KOSDAQ 150 constituents, they are spread widely without any clear market leaders, unlike the KOSPI 200. Electrical and electronics companies and machinery and equipment makers, which have benefited from the semiconductor boom, carry heavy weightings. The weighting of pharmaceutical and biotech stocks, which have been relatively weak this year, has shrunk but still accounts for a certain share. Share prices of pharmaceutical and biotech firms rest more on expectations for future earnings and growth than on current profits. Those expectations often hinge on events that split cleanly into success or failure, such as clinical trial results, contracts with major clients and order wins. On days when related disclosures or news reports emerge, share prices can swing by tens of percent in a single session.
Trading flows differ as well. The KOSDAQ has a low share of long-term money such as pension funds and is traded mainly by retail investors, so prices frequently drift away from corporate fundamentals. Overheated names grow more overheated, and neglected ones stay neglected longer. The more money flows into index-tracking products, the wider this distortion grows. Index constituents are bought and sold mechanically in line with fund flows, regardless of their earnings.
The KOSDAQ market is volatile because of this retail-driven trading, but turning the structure on its head reveals investment opportunities. Wide dispersion among individual stocks is a risk, but it also means the rewards for selection are large. Analyzing individual companies and picking stocks is an investment strategy that becomes all the more necessary in a range-bound market.
That is also the context in which many asset managers are launching active KOSDAQ exchange-traded funds. The performance of active KOSDAQ ETFs since September bears this out. Active KOSDAQ ETFs that trimmed exposure to highly volatile sectors and loaded up on stocks with confirmed earnings outperformed the KOSDAQ 150. Investors looking for a steady stream of cash flow may also want to consider KOSDAQ covered-call ETFs.
Selection is not a one-time judgment. Asset managers running active ETFs repeatedly review individual stocks and adjust their holdings. Investors need to keep checking whether excess returns against the index are coming through consistently and how the portfolio is allocated across individual companies and sectors. In a volatile market such as the current one, KOSDAQ investing looks better served by relying on the power of selection — deciding what to hold and what to exclude — than by betting on the market as a whole.