Expectations are growing for a reappraisal of the Kosdaq market. Foreign investors who recently left the KOSPI are flocking to Kosdaq amid the government's market-cleanup policies, including tighter delisting standards. The first Kosdaq active exchange-traded funds (ETFs) listed in the South Korean market also drew strong demand from the first day.

According to the Korea Exchange, from Feb. 5 to March 10 retail investors were net buyers of 169.366 trillion won on the KOSPI, while foreign investors were net sellers of 273.071 trillion won. Institutions were net buyers of 79.301 trillion won, showing a pattern in which retail investors largely absorbed foreign selling.

In contrast, over the same period on the Kosdaq, retail investors were net sellers of 34.544 trillion won, while foreign investors and institutions were net buyers of 21.629 trillion won and 25.528 trillion won, respectively. Unlike the KOSPI, Kosdaq is seeing simultaneous inflows from foreign and institutional funds.

Expectations for a structural improvement in the Kosdaq market underpin the shift in flows.

The Korea Exchange plans to overhaul delisting rules to accelerate the exit of so-called zombie companies. It will include firms with full capital impairment at half-year end as grounds for a substantive review of listing eligibility and tighten requirements for accumulated penalty points for unfair disclosures. An analysis says a qualitative improvement in the market is stimulating investment sentiment among institutions and foreign investors.

That positive tone carried over into the Kosdaq active ETFs listed on March 10.

Samsung Active Asset Management's "KoAct Kosdaq Active" and Timefolio Asset Management's "TIME Kosdaq Active" posted turnover of 575.2 billion won and 473.5 billion won, respectively, on their first trading day. Together, they attracted more than 1 trillion won.

Unlike passive products that mechanically track a specific index such as the Kosdaq 150, active ETFs aim for excess returns by having portfolio managers select promising stocks. These products also stood out for attempting aggressive reversals in portfolio weights beyond market-cap rankings.

Samsung Active Asset Management included Seongho Electronics, which ranks around 60th by Kosdaq market capitalization, with an 8.97 percent weight. Timefolio Asset Management also added Algynomics, around 47th, and Pado, around 30th, at 2.38 percent and 3.06 percent, respectively.

As the news was reported through the after-market the previous day, shares of small- and mid-cap stocks such as Qurient, Seongho Electronics and Algynomics jumped 10 to 20 percent. On March 10, Seongho Electronics, up 28.31 percent, and Qurient, up 25.37 percent, rose close to the daily limit.

The industry sees the launch of these active ETFs potentially leading to a broader dispersion of flows across Kosdaq small- and mid-cap stocks. For KoAct Kosdaq Active, stocks ranked 50th to 150th by market capitalization account for 37 percent of the total, a higher weighting than existing Kosdaq 150 passive ETFs at about 23 percent. The share of stocks not included in the Kosdaq 150 index also reaches around 10 percent.

Regulatory easing is another factor that could amplify the active ETF market.

Active ETFs are currently subject to the "correlation coefficient 0.7" rule, which requires them to move at least 70 percent in line with a benchmark index. Financial authorities are pushing to abolish the rule in the first half, raising prospects that so-called fully active management, with maximised manager discretion, will become possible.

Seungjin Park (박승진), an analyst at Hana Securities, said Kosdaq active ETFs used the overall Kosdaq index to broaden the range of stock selection. He added that differentiation based on active performance is expected, and that once fully active management becomes possible without correlation limits, return gaps driven by portfolio composition could become more pronounced.