"Tired of Sidecars"... Retail Investors Flock to 'Monthly Income ETFs' [Practical Asset Management]

Trading Halts Become Routine Amid Extreme Volatility

Products That Sacrifice Big Stock Rallies for Stable Bonuses

Total Net Assets of Covered Call ETFs Surpass 25 Trillion Won in July

As the stock market continues to experience extreme volatility, with prices swinging up and down, more investors are seeking to turn this very "volatility" into a source of profit. Covered call exchange-traded funds (ETFs) have become central to this trend. These products create monthly cash flow by adding option premiums to the returns from stock investments. Their appeal is growing because, in periods of falling stock prices, they can also help partially cushion losses.

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On July 28, South Korea's stock market saw both the KOSPI and KOSDAQ trigger sell-sidecars and circuit breakers, as the country's semiconductor leaders, Samsung Electronics and SK hynix, led a sharp plunge. In the previous week, the two markets experienced a total of seven sidecar activations, with warning alarms sounding every trading day except one out of five sessions.

Amid these trends, covered call ETFs have rapidly grown in size. The total net assets of domestic covered call ETFs surpassed 25 trillion won in July, and the number of products, which stood at only six a few years ago, has grown to around 50. Covered call ETFs, which become more attractive as volatility increases, are surprisingly simple in concept.

Giving Up Jackpot Gains for a Steady Bonus

Covered call strategies can be understood through the example of real estate. Imagine you purchased an apartment worth 1 billion won. Someone approaches you and offers, "I'll pay you a deposit of 50 million won now if you promise to sell the apartment for 1.1 billion won, unconditionally, after one year." Accepting this proposal is akin to the covered call strategy.

Even if the value of your home soars to 1.5 billion won after a year, you are obliged to sell it for 1.1 billion won as per the contract, so your profit is capped at 150 million won—the price difference plus the deposit. While others make 500 million won, you earn less. On the other hand, if the apartment price only fluctuates around 1 billion won, the other party is unlikely to exercise their right to buy, so you keep the full 50 million won deposit as profit. Even if the price plunges to 700 million won, the advance deposit reduces your actual loss to 250 million won.

The key is that this "deposit," or option premium, increases as market volatility rises. Call options are much like insurance: the more uncertain the outlook (the higher the volatility), the more expensive the premium. In fact, the average call option premium on the KOSPI200 index over the past 20 days reached 2.6% relative to the KOSPI200 index. For investors, the rise in volatility is a risk, but for covered call products, it signals an ample pool for distributions. In these turbulent market conditions, the flagship Korean covered call ETF (KODEX 200 Target Weekly Covered Call) recorded a dividend yield in the 10% range over the past year, and its total return since the start of the year reached the 70% range.

Limited Upside in Bull Markets... But 'Active' Strategies Offer a Solution

However, due to their structure, covered call ETFs inevitably underperform general index ETFs during strong bull markets when prices rise above the contract (strike) price. This is precisely the "earning less than others" scenario described in the apartment example.

Some products have addressed these structural limitations. These are "active" covered call ETFs. While the fundamental approach of selling call options remains the same, they can switch their holdings to suit market conditions, seeking excess returns (alpha).

For instance, the TIGER Semiconductor TOP10 Covered Call Active ETF, which focuses on semiconductor stocks, recorded over 50% returns from its listing in April through June. This outperformed the standard index ETF operating under the same principle (TIGER Semiconductor TOP10, which was in the high 40% range). Researcher Lee Sanghyun of Meritz Securities commented, "Active management allows these covered call products to overcome their structural limitations, giving investors both the benefit of monthly option premium distributions and a return that exceeds the index."

Tax Exemption and Deferral Benefits Make These Products Suitable for Retirement Planning

Distribution income from domestic equity covered call ETFs comes from: (1) dividends on underlying stock holdings, (2) capital gains from stock trading, and (3) premiums from selling options. Among these, there is no tax imposed on the capital gains and option premium components. In fact, a breakdown of major products' dividend distributions over the past year showed that only around 4% was taxable. Moreover, by utilizing Individual Savings Accounts (ISA) or pension accounts, investors can further reduce dividend income tax (15.4%) or their overall financial income tax burden. This, in turn, has drawn attention to covered call ETFs as both a haven in volatile markets and an effective tax-saving tool.

Of course, covered call ETFs are not completely safe or risk-free products. When the underlying assets plummet, option premiums cannot fully offset losses. Furthermore, each product uses its own formula for calculating distributions and managing its option strategies, making superficial comparison of numbers misleading.

Han Yonghee, a researcher at Growth Research, commented, "Covered call ETFs may appear to offer high and steady payouts every month, giving an impression of being a safe and high-yield product, but there are real risks lurking beneath the surface." He added, "Rather than investing only in covered call ETFs, a well-diversified portfolio that includes regular ETFs tracking the same indices is more effective."

Meanwhile, volatility in the domestic stock market is showing concerning signs even on a monthly basis. During July 1–24, including last week, the KOSPI's average intraday volatility was measured at 6.23%, the highest monthly figure ever recorded—even surpassing the 6.11% level seen during the peak of the global financial crisis in October 2008. This year's monthly average intraday volatility climbed from 2.06% in January to 2.69% in February, 3.77% in March, dipped slightly in April, then rose again to 4.02% in May, 5.02% in June, and over 6% in July. The KOSPI200 volatility index (VKOSPI) soared to an intraday high of 97.99 last month and then dropped to 78.65 on the 24th, but this still remains about twice as high as the 30–40 range seen earlier this year.

This content was produced with the assistance of AI translation services.