As volatility in Korea's stock market rises, retail investor money is quickly flowing into covered-call exchange-traded funds (ETFs). These products had fallen out of favor for a time because their returns are capped in surging markets, but as the market has recently swung between sharp drops and rebounds, they are drawing renewed attention as investments that can offer relatively steady cash flow and defensiveness.
According to Koscom ETF CHECK on the 24th, from the 16th to the 22nd, the No. 5 ETF by net purchases from retail investors was "KODEX 200 Covered Call Active," with individuals net buying 103.7 billion won during the period. "TIGER Dividend Covered Call Active" also saw an inflow of 96.5 billion won, ranking sixth.
As of the previous day, the total net assets of the 61 covered-call ETFs listed in Korea stood at 26.3957 trillion won, up about 11 trillion won from the start of the year. The number of products also increased from 52 to 61 over the same period.
This is seen as the result of heightened market volatility, with the KOSPI falling about 1,400 points in three weeks, from 8,476.48 in early this month to 7,096.89 on the day. In the recent main board, a sidecar was triggered for five straight sessions, and Samsung Electronics and SK hynix have also seen large swings as concerns about the semiconductor cycle and demand for rebalancing in single-stock leveraged ETFs have overlapped, regardless of earnings outlooks.
A covered-call ETF is a product that holds the underlying assets while simultaneously selling call options on those assets and using the option premiums received as a source of distributions. Thanks to the option premiums, it can offer relatively stable performance compared with plain index ETFs in range-bound or mildly declining markets.
◇ Weekly options, partial call writing… "2nd and 3rd generation" covered calls emerge
What stands out is that the covered-call ETFs now gaining popularity are evolving to address the weaknesses of earlier products. Traditional covered-call ETFs sold calls on most of the underlying assets they held. Because selling options requires handing over gains above a certain level to option buyers, a key limitation was that returns could significantly lag plain index ETFs in bull markets.
In fact, "TIGER 200 Covered Call," the longest-running covered-call ETF, showed defensiveness with lower volatility than the KOSPI during the 2021, 2022 and 2024 downturns. The ETF's annualized volatility (yearly price fluctuation range) was 16%, 8 percentage points lower than the KOSPI's 24%. However, in phases like this year when the market rallied strongly, it captured only about 26% of the KOSPI 200's upside. The more calls sold, the harder it is to track gains in rising markets—this structural limit defined the traditional covered-call strategy.
By contrast, the recently launched 2nd and 3rd generation covered-call ETFs use weekly options or apply a "partial call writing" strategy that sells calls on only part of the portfolio. By selling options on only a portion rather than all of the underlying assets, they are designed to secure option premiums while allowing the remaining assets to fully reflect price gains. As a result, they can capture option premiums in range-bound markets while offering higher upside participation than earlier products in bull markets.
A prime example is the "KODEX Semiconductor Target Weekly Covered Call ETF," listed in May. While allocating more than 50% to Samsung Electronics and SK hynix, the product sells KOSPI 200 weekly options on only about 30% of its assets. Because it does not sell calls on the entire underlying, it can track a substantial portion of gains if the rally continues, while using option premiums to supplement returns when the market is flat or weak.
Park U-yeol, an analyst at Shinhan Investment & Securities, said, "First-generation covered-call ETFs had their biggest weakness in low participation during rallies due to high call-writing ratios," adding, "Newer products are designed to track performance to some extent even in bull markets by using weekly options and adjusting the share of options sold."
◇ "Don't invest just by looking at high payout ratios"
However, investors should note that a covered-call ETF is not a "principal-protected product." If the prices of the underlying assets fall sharply, the ETF price will inevitably decline as well, and even if distributions are paid, overall returns can be negative if the share price drop exceeds them.
In fact, "PLUS High Dividend Weekly Covered Call" drew attention for having the highest payout ratio among similar products, but its return this year was -24%. "RISE 200 High Dividend Covered Call ATM," which ranked No. 1 in one-month returns recently, also fell 18.81% over the same period. High distributions do not always translate into strong investment performance.
Jang Chi-young, an analyst at Hana Securities, said, "When choosing a covered-call ETF, it is necessary to consider the underlying assets, the option strategy, and the target payout ratio comprehensively," adding, "In particular, the share of options sold and how it is adjusted are key factors that set the balance (trade-off) between defensiveness and upside participation."