Retail Investors Pour $2 Billion Into Covered-Call ETFs as Korea Stocks Slide [ETF Zoom In]

As the stock-market correction drags on, big money piles into covered-call products

Retail investors have poured heavily into covered-call ETFs during the recent market pullback

Active covered-call ETFs designed to overcome the limits of passive strategies are also coming to market

"Investors should choose products based on their goals — upside participation versus stable income"

South Korea’s ETF market made history in the first half of this year by surpassing 500 trillion won ($359.7 billion) in net assets. Leveraged ETFs tied to Samsung Electronics Co. and SK Hynix Inc. that listed at the end of May drew attention not only in Korea but across global equity markets. ETFs, once seen as a supplementary investment tool, have now become a core investment product. ETF Zoom In takes a closer look at the increasingly complex ETF market. [Editor’s note]

Retail investors are pouring money into covered-call exchange-traded funds as the correction in South Korea’s stock market drags on. Active covered-call ETFs, designed to address the limits of passive covered-call products, are also being launched in quick succession. Securities-industry experts say investors need to choose products based on their goals because each active covered-call ETF uses a different strategy.

Big Inflows Into Active Covered-Call ETFs

According to Koscom ETF Check, five covered-call ETFs ranked in the top 10 for net buying by retail investors over the past three months as of October 29. They were KODEX 200 Covered Call Active at 772.8 billion won ($556 million), KODEX 200 Target Weekly Covered Call at 738.9 billion won ($532 million), TIGER Dividend Covered Call Active at 677.5 billion won ($487 million), RISE Korea Value-Up Weekly Fixed Covered Call at 342.2 billion won ($246 million), and TIGER US Nasdaq 100 Target Daily Covered Call at 271.5 billion won ($195 million).

The other five in the top 10 were TIGER US S&P500 at 1.4165 trillion won ($1.02 billion), KODEX US Nasdaq 100 at 876 billion won ($630 million), KODEX US S&P500 at 809.7 billion won ($583 million), TIGER US Nasdaq 100 at 602.7 billion won ($434 million), and TIGER US Dividend Dow Jones at 328.3 billion won ($236 million).

Ha Jae-seok, an analyst at NH Investment & Securities, said inflows into the ETF market have slowed since July as weakness in the Kospi persisted. In the first half, money was concentrated in domestic equity ETFs. More recently, flows have shifted to ETFs tracking major US indexes and to covered-call ETFs.

Covered-call ETFs can soften part of the losses when the underlying asset falls because premiums from selling call options provide a buffer. Their drawback is limited upside in rising markets because those same option sales cap participation. That weakness becomes especially clear during rallies or sharp rebounds after a decline.

Active covered-call ETFs seek to address that limitation by adjusting stock portfolios and call-option writing strategies more flexibly in line with market conditions.

Six Active Covered-Call ETFs Listed This Year

A total of six active covered-call ETFs have listed on South Korea’s main stock market this year, double last year’s three. In addition to Kospi 200-based covered-call products, new active covered-call ETFs have emerged using a range of underlying assets including semiconductors, dividend stocks and the Kosdaq.

The six products listed this year are TIGER Semiconductor TOP10 Covered Call Active on April 21, ACE High Dividend Plus Covered Call Active on June 2, PLUS 200 Covered Call Active on June 23, KIWOOM Kosdaq 150 Covered Call Active on June 30, KODEX 200 Covered Call Active on July 14, and RISE Kosdaq Covered Call Active on July 28. According to the financial investment industry, two more — TIGER 200 Covered Call Active and SOL 200 Covered Call Active — are also set to list.

In the US, active covered-call ETFs have already become the mainstream of the covered-call market. As of October 23, the JPMorgan Equity Premium Income ETF, or JEPI, had net assets of $45.613 billion, while the JPMorgan Nasdaq Equity Premium Income ETF, or JEPQ, had $42.763 billion. The NEOS Nasdaq-100 High Income ETF, or QQQI, stood at $15.044 billion. Those products rank among the largest covered-call ETFs in the US market.

Brokerage analysts say investors in active covered-call ETFs should choose products based on whether they prioritize upside participation or stable income.

Ha said major active covered-call ETFs have outperformed passive covered-call ETFs in rising markets, helping offset the drawback of lagging benchmark indexes. In the recent downturn, however, their downside-protection effect has not been confirmed. Kospi 200-based active covered-call ETFs may be effective when stocks are rising, while dividend-stock active covered-call ETFs can reinforce stability during periods of heightened volatility.

Lee Su, Hankyung.com reporter, 2su@hankyung.com