With expectations that the Iran war will wind down pushing the KOSPI index toward its previous peak, a substantial amount of investment money is flowing into exchange-traded funds (ETFs) that use covered call strategies. Covered call ETFs track an index while generating additional revenue by selling options, because option premiums rise when market volatility is high.
Experts advised investors to scrutinize each covered call ETF's strategy and distribution trends before investing.
According to Koscom ETF Check on the 17th, during the past week (Apr. 10–16), KODEX 200 Target Weekly Covered Call drew 127.8 billion won, ranking No. 2 for ETF inflows overall.
Individual money, in particular, stood out. During the same period, among the top 20 net buys by individuals were SOL 200 Target Weekly Covered Call (37.2 billion won), KODEX U.S. Dividend Covered Call Active (32.6 billion won), and TIGER Dividend Covered Call Active (28.0 billion won).
A covered call ETF buys stocks while selling call options—the right to buy those stocks—to capture option sales revenue (premiums). Even if it cannot fully enjoy gains from rising share prices, it has the advantage of reducing losses by the amount of the option premium when prices fall.
In particular, in a market like recently with high volatility, option premiums tend to rise. As a result, distribution yields increase, highlighting the advantage of capturing additional profits.
KODEX 200 Target Weekly Covered Call steadily raised its distribution from 213 won in January to 244 won in February, 252 won in March, and 262 won in April. TIGER Dividend Covered Call Active also increased its distribution to 320 won in January, 375 won in February, and 350 won in March, while its distribution rate relative to market price rose from 1.84% the previous month to 2.48%.
Covered call ETFs' steady monthly distributions during a volatile market are seen as having significantly helped attract funds.
However, experts said investors should understand the characteristics of covered call ETFs before investing. Because they use an option-selling strategy, the structure makes it difficult to fully track index gains.
Covered call ETFs can also create an illusion that masks declines in net asset value (NAV) because of high distribution yields. They may appear to be high-dividend on the surface, but in reality could be "eating into themselves," with part of the principal being distributed.
Therefore, when making investment decisions, investors should check total returns comprehensively, including price fluctuations, not just distribution yields. An official in the financial investment industry said, "Because covered calls pay distributions based on option premiums, if investors look only at the distributions, the actual total return may fall short of expectations."
The official added, "Particularly from a long-term investment perspective, performance may lag compared with plain index strategies, so unless the goal is to secure short-term cash flow, it may be advisable to use them in a limited way as part of a portfolio."