Retail Investors Pour $2 Billion Into Covered-Call ETFs Despite Stock Slump [ETF Zoom In]

As the stock-market correction drags on, cash floods into covered-call products

Retail money has poured into covered-call ETFs during the recent market pullback

Active covered-call ETFs designed to overcome the limits of passive strategies are also launching in succession

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 as assets under management topped 500 trillion won ($360.8 billion). Leveraged ETFs tied to Samsung Electronics Co. and SK Hynix Inc., listed at the end of May, drew attention beyond Korea and across global equity markets. ETFs, once seen as supplementary investment tools, have become core portfolio products. ETF Zoom In takes a closer look at the increasingly complex ETF market. [Editor’s note]

Retail investors are pouring into covered-call exchange-traded funds as the correction in South Korea’s stock market drags on. Active covered-call ETFs, which aim to overcome the limitations of passive covered-call products, are also being launched in quick succession. Brokerage analysts advise investors to choose products based on their investment goals, as each active covered-call ETF employs a different strategy.

Active Covered-Call ETFs Draw Big Retail Inflows

According to Koscom ETF Check on Oct. 31, five covered-call ETFs ranked among the top 10 by net purchases from retail investors over the past three months as of Oct. 29.

They were KODEX 200 Covered Call Active with 772.8 billion won ($557.6 million), KODEX 200 Target Weekly Covered Call with 738.9 billion won ($533.2 million), TIGER Dividend Covered Call Active with 677.5 billion won ($488.9 million), RISE Korea Value-Up Weekly Fixed Covered Call with 342.2 billion won ($246.9 million), and TIGER US Nasdaq 100 Target Daily Covered Call with 271.5 billion won ($195.9 million).

The other five names in the top 10 were TIGER US S&P 500 with 1.4165 trillion won ($1.02 billion), KODEX US Nasdaq 100 with 876 billion won ($632.1 million), KODEX US S&P 500 with 809.7 billion won ($584.2 million), TIGER US Nasdaq 100 with 602.7 billion won ($434.9 million), and TIGER US Dividend Dow Jones with 328.3 billion won ($236.9 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 has 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 have the advantage of helping reduce losses even when underlying assets decline, because premiums earned from selling call options can offset part of the drop. Their drawback is that upside participation is limited in rising markets because of the call-option sales. That weakness is especially apparent during stock-market rallies or sharp rebounds after declines.

Active covered-call ETFs seek to address that limitation by adjusting stock portfolios and call-option selling strategies more flexibly depending on 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 bourse this year, double the three launched last year. In addition to Kospi 200-based covered-call products, active covered-call ETFs using a range of underlying assets, including semiconductors, dividend stocks and the Kosdaq, have also appeared.

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

In the US, active covered-call ETFs have already become the mainstream in the covered-call market. As of Oct. 23, JPMorgan Equity Premium Income ETF, or JEPI, had $45.613 billion in assets, while JPMorgan Nasdaq Equity Premium Income ETF, or JEPQ, had $42.763 billion, and NEOS Nasdaq-100 High Income ETF, or QQQI, had $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 delivered better performance than passive covered-call ETFs in rising markets, helping offset the drawback of underperforming the index. But in the recent downturn, their ability to defend returns has not been confirmed. Kospi 200-based active covered-call ETFs can be effective during periods of stock gains, while dividend-stock active covered-call ETFs can help reinforce stability when volatility rises.

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