Covered-call ETFs draw W789.1b in a month as Kospi drifts

Retail investors are pouring money into covered-call ETFs as the domestic stock market struggles to find direction amid persistent volatility. The appeal lies in the strategy’s ability to capture some upside from share price gains while generating regular cash flow through option premiums.

According to ETF CHECK, retail investors made net purchases totaling 789.1 billion won ($572 million) in five major covered-call ETFs over the past month, from July 27 to Thursday.

The KODEX 200 Covered Call Active ETF led the inflows with 351.5 billion won in net purchases. The TIGER Dividend Covered Call Active drew 219.3 billion won over the same period, while the KODEX 200 Target Weekly Covered Call and KODEX Financial High Dividend TOP10 Target Weekly Covered Call attracted 150.9 billion won and 67.4 billion won, respectively.

The trend reflects growing investor demand for steady cash flow rather than relying solely on index gains, as uncertainty and volatility in the domestic market have increased.

Korea Exchange data show the Kospi rose just 3.31 percent between July 27 and Thursday. While the index managed to hold above the 6,900 level, it has repeatedly failed to break through 7,000 and has not recaptured the sharp upward momentum seen in April and May.

With the index lacking clear direction, covered-call ETFs have emerged as an investment alternative — allowing partial participation in share price gains while using option premiums to fund distributions. The covered-call strategy involves holding stocks and simultaneously selling call options on those same underlying assets, pursuing gains from price appreciation while channeling the premiums received from selling the calls into distribution payouts.

“As the sharp Kospi plunge and rebound wind down and the market enters a period of uncertainty about its next direction, a strategy of reducing portfolio volatility through covered calls is advisable,” said Kim Jae-seung, a researcher at Hyundai Motor Securities.

The covered-call ETF market is expanding rapidly. According to Korea Exchange, total assets under management of domestically listed covered-call ETFs grew from 15.11 trillion won at the start of the year to 27.57 trillion won as of Wednesday, an increase of more than 12 trillion won in less than eight months.

Actively managed covered-call ETFs are also gaining traction. The active covered-call approach combines the standard covered-call strategy — holding stocks while selling call options to earn premiums — with flexible, actively managed adjustments to stock selection and the proportion of options sold depending on market conditions. The flagship product in this category, TIGER Dividend Covered Call Active, has reached 2.69 trillion won in assets under management.

The range of underlying assets is also broadening beyond dividend stocks to include semiconductors and Kosdaq-linked products. Kiwoom Investment Asset Management launched the KIWOOM Kosdaq150 Covered Call Active ETF in June, based on the Kosdaq 150 index.

However, covered-call ETFs can limit gains in a rising market. Because the strategy involves selling call options, investors may not fully benefit from a sharp rally in the underlying assets.

Investors should also examine the specific strategy of each product. Even within the covered-call ETF category, differences in underlying assets, the proportion of options sold, and the selling frequency mean that the degree of upside participation and the source of distribution income can vary significantly. Rather than focusing solely on the distribution rate, investors need to look at both the underlying assets and the options management strategy.

“The key factor driving covered-call ETF performance is the price direction of the underlying stocks held,” said Ha Jae-seok, a researcher at NH Investment & Securities. “Investors should therefore first assess the medium- to long-term direction and volatility of the underlying assets.”

moon@heraldcorp.com