Since the launch of former President Trump's second administration, the U.S. stock market has experienced sharp fluctuations, leading to an influx of funds into covered call exchange-traded funds (ETFs) that follow the domestic stock market. Covered call ETFs, which distribute monthly dividends of over 1% and offer tax benefits on derivatives revenue, have gained popularity. In particular, the popularity of covered call ETFs utilizing weekly options is remarkable.
However, investment warnings have increased regarding these ETFs where a large amount of money has flowed in a short period. This is because the premium on weekly options, which is the source of the distribution, has shrunk. The option premium, which is affected by market volatility, is the source of the monthly dividends paid by covered call ETFs. When this premium decreases, the revenue is bound to fall.
The problem lies in the fragile structure where the more funds flock to these ETFs, the lower the revenue may become. In the stock market, five types of weekly covered call ETFs launched by Samsung Asset Management, KB Asset Management, and Hanwha Asset Management are being traded, with their net worth approaching 1 trillion won.
To generate revenue from these ETFs, fund managers sell options, and as a large amount of capital flowed in over a short period, the volume of option sales increased, leading to a decrease in option premiums. In simpler terms, this creates a situation where a shortage of buyers can cause market distortions.
According to Koscom on the 17th, with the volatility of the domestic stock market easing this year, the overall option premiums have fallen, while weekly option premiums have decreased even more significantly. Recently, as volatility in the global stock market has expanded, monthly option premiums have been on a recovery trend, while weekly option premiums have shown weakness, widening the gap between the two options.
In the first half of last year, weekly option premiums traded at an average of 29% compared to monthly option premiums, but this year the difference has reduced to around 20%. Recently, weekly option premiums have been undervalued by over 30% compared to monthly option premiums from the same period last year.
Analysts suggest that the unusual reduction in weekly option premiums is due to the influx of funds into covered call ETFs in a short time. A source from the financial investment industry noted, "Recently, several covered call ETFs generating revenue from selling weekly options were launched, and these ETFs have drawn considerable market funds, increasing option sales," adding, "The sudden rise in selling volume has decreased the intrinsic value of call options, leading to lower premiums."
Covered call ETFs generate revenue by selling call options, which give the right to purchase the underlying asset at a predetermined price, and add the profit (premium) from this sale. This revenue is distributed as monthly dividends.
In particular, weekly options, which have shorter maturities than standard options, are relatively cheaper and more sensitive, leading to larger changes in revenue based on fluctuations in the underlying asset. For this reason, covered call ETFs that sell weekly options instead of standard options have been continually launched among ETFs tracking domestic indices.
KB Asset Management launched the "RISE 200 Weekly Covered Call" ETF for the first time last March, and by the end of last year, Samsung Asset Management released the "KODEX 200 Target Weekly Covered Call" and "KODEX Financial High Dividend TOP10 Target Weekly Covered Call." Hanwha Asset Management is also managing the "PLUS High Dividend Weekly Covered Call," and the net worth of these four weekly covered call ETFs alone is 913.5 billion won.
However, as weekly option premiums decrease, the revenue of these ETFs will inevitably be affected. Since these ETFs are products that generate regular monthly cash inflows and have gained a reputation, fund managers make significant efforts to maintain dividends. Ultimately, to provide regular monthly dividends, the price of the corresponding ETFs is bound to drop. This is why the gap between the ETF base price and the tracking index increases as the investment horizon lengthens.
The longer funds continue to flow into these ETFs, the more likely option premiums are to decline further. An industry source noted, "The covered call strategy enjoyed considerable popularity in past public funds, but it was a fleeting popularity," adding, "If fund managers continue to uphold unrealistic dividends, investors may turn away from the covered call strategy in the ETF market."
This source stated, "Unless you are an investor needing cash every month, you should evaluate not only the dividends but also how much total revenue outperforms the index before investing," noting that investing in the basic ETF is preferable to covered calls.