Retail Investors Pile Into Covered-Call ETFs as Kospi Slides 21%

‘Roller-Coaster Kospi’ Leaves Investors Reeling

Covered-Call ETFs With Returns Above 20% Gain Traction as a Haven

Covered-call ETFs stand out as the Kospi falls 21%

RISE 200 High Dividend Covered Call ATM posts a 23% return

Newer products now sell options on only part of their holdings

Retail investors are pouring money into covered-call exchange-traded funds as volatility grips South Korea’s stock market. The strategy had fallen out of favor because it caps gains in rising markets, but sharp swings have brought renewed interest from investors seeking steadier cash flow and downside protection.

Data from Koscom ETF Check on July 25 showed that, excluding inverse and leveraged products, the top-performing ETFs over the past month included RISE 200 High Dividend Covered Call ATM, ranked first with a 23.17% return, PLUS High Dividend Weekly Covered Call, ranked second with 17.14%, PLUS High Dividend Weekly Fixed Covered Call, ranked seventh with 10.54%, and KODEX Financial High Dividend TOP10 Target Weekly Covered Call, ranked eighth with 10.34%.

That contrasts with a decline of more than 21% in the Kospi over the same period. Covered-call ETFs have drawn attention as the market swung wildly, with sidecar trading curbs triggered 11 times in the Kospi market over the past month.

A covered-call ETF holds underlying assets while selling call options on them at the same time. It uses the option premiums collected to fund distributions. The structure can offer relatively stable performance compared with plain index ETFs in flat markets or during moderate declines.

The three top-performing covered-call ETFs recently shared one feature: all are based on high-dividend stocks. Volatility in the domestic stock market has pushed investor sentiment toward defensive shares, lifting stocks in finance, insurance and telecommunications. All three products have large weightings in DB Insurance and Industrial Bank of Korea, while Samsung Card, Samsung Fire & Marine Insurance and LG Uplus are also included.

Retail money has followed. Over the same period, the biggest net purchases by individual investors in ETFs included TIGER Dividend Covered Call Active, ranked 13th with 565.9 billion won, KODEX 200 Target Weekly Covered Call, ranked 22nd with 436.8 billion won, and TIGER US Nasdaq 100 Target Daily Covered Call, ranked 27th with 326.2 billion won. Excluding single-stock leveraged products and semiconductor funds, covered-call products accounted for the largest share.

Newer products have also emerged to address one of the strategy’s main drawbacks. Traditional covered-call ETFs typically sell call options on most of their underlying holdings, limiting upside in rising markets. More recent versions sell options on only part of the portfolio, leaving the remainder exposed to further gains.

A representative example is the KODEX Semiconductor Target Weekly Covered Call ETF, which listed in May. The fund allocates more than 50% of its holdings to Samsung Electronics and SK Hynix, while selling Kospi 200 weekly options on only about 30% of its assets. Because it does not write call options on the entire portfolio, the product is designed to track much of the upside in a rising market while supplementing returns with option premiums when stocks move sideways or weaken.

KODEX 200 Covered Call Active, which topped 200 billion won in net purchases by retail investors within a week of its July 14 listing, is seeking excess returns. The fund is an evolved version of KODEX 200 Target Weekly Covered Call, a flagship product in South Korea’s covered-call market. It retains the earlier fund’s strengths, including tax benefits tied to domestic option premiums and a 17.1% dividend yield over the past year, while pursuing additional returns through an active strategy.

Noh Jung-dong, Hankyung.com reporter, dong2@hankyung.com