Investors Wary of Samsung, SK Hynix Turn to Covered-Call ETFs Amid Market Volatility

Covered-call ETFs attract fresh inflows as market volatility rises

Some index ETFs are also seeing money move into covered-call products

As volatility picks up in South Korea’s stock market, some covered-call exchange-traded funds tied to semiconductor shares and the Kospi 200 are drawing investor interest with relatively resilient returns.

Data from ETF Check on June 5 show Mirae Asset Global Investments’ TIGER Semiconductor TOP10 Covered Call Active ETF returned 31.8% over the past month. The fund took in 319.4 billion won ($231 million) during that period, topping the 273.3 billion won ($198 million) that flowed into the firm’s flagship TIGER Semiconductor TOP10 ETF. Shinhan Asset Management’s SOL 200 Target Weekly Covered Call, listed in March, posted a 30.83% return over the same period.

Covered-call ETFs were once largely viewed as monthly payout products. More recently, they have evolved into strategy funds spanning semiconductors, high-dividend stocks and bond-mix structures. The shift reflects demand from investors seeking steady cash flow while still participating in part of the market’s upside during volatile trading.

Covered-call ETFs target retirement accounts

A covered call is a strategy in which an investor holds stocks and sells call options to collect premiums. Investors give up part of the upside in exchange for option income, making the structure a common one for monthly distribution ETFs.

South Korean asset managers have recently rolled out new forms of covered-call ETFs. Many are now aimed at retirement-account demand rather than simply monthly payouts. Because retirement pension accounts face limits on risk-asset exposure, firms have been launching products that mix in bonds or build portfolios around dividend-paying stocks.

Under South Korea’s retirement pension rules, risk-asset allocations are capped at 70%. Within that limit, investors are using bond-mix products to navigate the ceiling or dividend-stock portfolios to improve risk-adjusted efficiency in pension accounts.

Korea Investment Management listed the ACE High Dividend Plus Covered Call Active ETF on June 2. The product holds 20 domestic high-dividend stocks, adds Samsung Electronics Co. and SK Hynix Inc., and combines that with a strategy of selling Kospi 200 weekly options. Hanwha Asset Management on the same day listed the PLUS 200 Weekly Covered Call Bond Mixed ETF, which combines a Kospi 200 covered-call strategy with South Korean government bonds.

The PLUS 200 Weekly Covered Call Bond Mixed ETF allocates half its assets to Kospi 200-related holdings and half to government bonds. It is designed to let investors participate in part of any equity gains while reducing volatility. The product is also intended for wider use in individual retirement pension, or IRP, accounts and defined-contribution retirement plans.

The ACE High Dividend Plus Covered Call Active ETF follows a similar approach. By adding Samsung Electronics and SK Hynix to a dividend-stock portfolio, it aims to capture both dividend income and capital gains. The fund targets retail investors who do not want to miss the recent semiconductor rally.

Covered-call ETFs court retail investors eager to join the semiconductor rally

Mirae Asset launched the TIGER Semiconductor TOP10 Covered Call Active ETF in April. The fund invests in leading South Korean semiconductor stocks and overlays a covered-call strategy.

Performance has been solid. ETF Check data show the TIGER Semiconductor TOP10 Covered Call Active ETF returned 4.6% over the past week and 31.8% over the past month. Over the same periods, Mirae Asset’s standard semiconductor ETF, TIGER Semiconductor TOP10, returned 5.69% and 25.58%, respectively.

Money has also poured in quickly. The TIGER Semiconductor TOP10 Covered Call Active ETF attracted 319.4 billion won ($231 million) over the past month, a sizable inflow for a product listed less than two months ago. That was more than the 273.3 billion won ($198 million) that went into TIGER Semiconductor TOP10 over the same period.

Index-based covered-call ETFs have also posted firm returns. SOL 200 Target Weekly Covered Call, listed in March, returned 6.96% over the past week and 30.83% over the past month. The product is structured to participate in gains in the Kospi 200 while also seeking distribution income from option premiums.

The trend comes as market swings have intensified. The Kospi jumped 19.2% from 7,493.18 on May 15 to 8,933.62 on June 2, then fell 3.3% over the next two days. The Kosdaq was also volatile, dropping more than 9% from 1,129.82 to 1,026.03 over the same period before rebounding 2.3% in a day.

Some money shifts from index ETFs into covered-call products

As return gaps widen across sectors and markets, investor interest is also rising in strategy ETFs that offer cash flow while keeping exposure to leadership areas of the market.

TIGER 200, which tracks the Kospi 200, posted net outflows of 74.7 billion won ($54.1 million) over the past month. By contrast, TIGER 200 Target Weekly Covered Call recorded net inflows of 16.5 billion won ($12 million) during the same period. The difference in returns was small: TIGER 200 Target Weekly Covered Call returned 32.13% over the past month, versus 33.23% for TIGER 200.

Lim Eun-hye, an analyst at Samsung Securities Co., said covered-call ETFs are emerging as an alternative as volatility increases in domestic and overseas stock markets. Because option prices rise as market volatility climbs, these products tend to deliver stronger returns than their underlying indexes when stocks move sideways, she added.

The Korea Exchange’s planned launch of weekly options on individual stocks is also lifting expectations for market expansion. The bourse plans to list weekly options on Samsung Electronics, SK Hynix, Hyundai Motor Co. and LG Energy Solution Ltd. on June 29. Market participants expect that to open the door to more covered-call ETFs tied to semiconductors, artificial intelligence themes and individual large-cap stocks.

Chasing distributions alone can backfire

Still, professionals say investors in covered-call ETFs need to watch for a dividend trap. Even if an investor receives a high monthly distribution, the actual value of the investment can fall if the ETF’s price declines by more than the payout.

For example, someone who invests 10 million won ($7,250) and receives a 1 million won ($725) distribution would make an actual profit of only 500,000 won ($362) if the ETF’s value falls to 9.5 million won ($6,887). That is why distributions alone are not enough to judge performance.

Lim said investors should always check total return, including both distributions and price moves, rather than focusing only on payouts. A high distribution yield may reflect a large payout, but it can also result from a lower ETF price.

The structure also comes with limits in a strong bull market. Because investors surrender part of the upside in the underlying asset in exchange for option premiums, covered-call ETFs can lag conventional equity ETFs when stocks rise sharply. In down markets, option premiums can cushion part of the loss, but they do not prevent losses of principal.

Lim added that distributions could also be suspended or cut more sharply than expected. Investors need to be clear about their investment objective.

Kim Yeon-ji, Hankyung.com reporter kongzi@hankyung.com