Samsung Asset Management will launch a conditional covered call exchange-traded fund (ETF) that manages volatility by selling call options (the right to buy at a specific price) when the "fear index" surges, while also tracking the U.S. Standard and Poor's (S&P 500) index. This is the world's first.
Samsung Asset Management held a webinar for reporters on the 7th and made this announcement. The "KODEX S&P 500 Volatility Expansion Covered Call," to be listed on the 12th, normally tracks the S&P 500 index by 100%. However, when greater volatility is anticipated, the covered call proportion will be increased to 100%.
The criteria for this ETF to automatically adjust the covered call proportion between 0% and 100% daily is based on the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The VIX indicates the expected volatility of the S&P 500 index over the next 30 days in numerical form, surging when market anxiety increases. This is commonly referred to as the "fear index."
The KODEX S&P 500 Volatility Expansion Covered Call will increase the covered call ratio to 100% when the VIX is above its previous 20-day average, and when the price of nearby futures in the VIX futures market is higher than that of distant futures, indicating a backwardation situation.
Generally, the nearer future is less uncertain than the more distant future, so VIX future prices should be lower as the expiration approaches. When the opposite backwardation appears, the KODEX S&P 500 Volatility Expansion Covered Call reflects this as a kind of warning signal.
In the webinar, Jeong Jae-wook, Head of Team at Samsung Asset Management's ETF Management Team 3, explained, "Typically, when volatility increases, the S&P 500 index decreases, and during this time, we sell call options to defend, conversely tracking when volatility decreases and the index rises."
Samsung Asset Management stated that it has completed the validation of the underlying index of the KODEX S&P 500 Volatility Expansion Covered Call based on simulations with the world's largest index provider, S&P, and specialized options provider CBOE.
According to simulations, considering the market turmoil caused by the U.S.-China trade conflict in 2018, while the S&P 500 index fell by 8.8%, the KODEX S&P 500 Volatility Expansion Covered Call only dropped by 2.4%.
In 2020, when the market plummeted due to the COVID-19 pandemic and then rebounded, the KODEX S&P 500 Volatility Expansion Covered Call rose by 36.1%, exceeding the S&P 500 index's growth rate of 16.3%. In the generally bullish period of 2023, the KODEX S&P 500 Volatility Expansion Covered Call recorded a growth rate of 26%, closely matching the S&P 500 index's growth rate of 26.3%.
Head of Team Jeong noted, "While I believe the S&P 500 index will trend upward in the long term, declines often occur due to events like the dot-com bubble, the global financial crisis, and the pandemic," adding, "We designed the product with the thought that a volatility management tool is necessary for investors to continue their investments."
However, the KODEX U.S. S&P 500 Volatility Expansion Covered Call differs from existing dividend-focused covered call ETFs. While it also distributes dividends each month, it does not always guarantee additional revenue from options. Additional distributions will only be given within the limits of option premiums when there is outperformance compared to the S&P 500 index over the last three months each quarter. The regular distribution indicates an annual dividend yield of 1-2% from the corporations within the S&P 500 index.
An Jeong-jin, Head of Team at Samsung Asset Management's ETF Consulting Team, stated, "Investors who are interested in dividend-focused covered call ETFs for cash flow may use the KODEX U.S. S&P 500 Volatility Expansion Covered Call as a complementary product (to their revenue)."
The KODEX U.S. S&P 500 Volatility Expansion Covered Call can hold up to 70% in retirement pensions and up to 100% in individual pensions. The total fee is 0.39% per annum. It is exposed to fluctuations in the won against the U.S. dollar as it does not hedge foreign exchange.