A Covered-Call ETF, but "Active"? ... Why New Products Keep Rolling Out

Three listed last year... six already launched this year
Greater upside participation than passive covered-call ETFs
Already key products in the United States

As covered-call exchange-traded funds (ETFs), which generate stable cash flow during stock market corrections, gain popularity, products using active management strategies are also being launched one after another. They are emerging as an investment alternative because they offer greater participation in market gains than conventional covered-call ETFs, whose upside participation is limited.

According to the Korea Exchange on October 28, a total of six active covered-call ETFs have been listed on the securities market this year: RISE Kosdaq Covered Call Active, KODEX 200 Covered Call Active, KIWOOM Kosdaq 150 Covered Call Active, PLUS 200 Covered Call Active, ACE High Dividend Plus Covered Call Active, and TIGER Semiconductor TOP 10 Covered Call Active. Three such products were listed over the whole of last year, so the number launched this year has already doubled.

Funds are also flowing in rapidly. According to ETF Check on October 27, TIGER Dividend Covered Call Active attracted KRW 493.5 billion over the past month, ranking eighth among ETFs listed in Korea in terms of inflows. KODEX 200 Covered Call Active ranked ninth, with KRW 395.1 billion flowing in over the same period.

Covered-call ETFs hold underlying assets while seeking option premiums by selling call options. If the underlying assets decline, the premiums from selling options can partially cushion the downside, while also providing distributions. Buying interest has recently surged as investors seek a strategy to secure stable cash flow amid market volatility.

At the same time, covered-call ETFs have a limitation: selling call options restricts their participation in market gains. Active covered-call ETFs are drawing attention because they can partly address this issue. They use active strategies to adjust their stock portfolios flexibly according to market conditions and to modify option-selling strategies, including the proportion of options sold, strike prices, and expiration dates, thereby increasing their participation in market gains.

In fact, even covered-call products based on the same KOSPI 200 index have different features. Listed in July, KODEX 200 Covered Call Active is based on KOSPI 200 constituents but increases the allocation to key companies and stocks with shareholder-return policies. It reduces the proportion of options sold in rising markets to allow greater participation in stock price gains. PLUS 200 Covered Call Active was designed for immediate use when daily options on the KOSPI 200 are introduced. The introduction of daily options to the KOSPI 200 options market is currently under discussion. Using options with shorter expiration periods would allow the fund to sell options more frequently and manage its portfolio more precisely according to market conditions.

In the United States, active covered-call products have already become central to the market. JPMorgan Equity Premium Income ETF (JEPI) has net assets of USD 45.6 billion (approximately KRW 60.4108 trillion), JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) has USD 42.7 billion (approximately KRW 56.5869 trillion), and NEOS Nasdaq-100 High Income ETF (QQQI) has USD 15 billion (KRW 19.8735 trillion). These products rank first through third in net assets among covered-call ETFs in the United States.

Ha Jaeseok, a researcher at NH Investment & Securities, said, "Recently, leading active covered-call ETFs have outperformed passive covered-call ETFs in rising markets, addressing their weakness of underperforming the index. However, they have not demonstrated a defensive effect on returns during the recent downturn." He added, "Active covered-call ETFs based on the KOSPI 200 may be effective during market upswings, while dividend-stock-based active covered-call ETFs can help bolster stability during periods of heightened volatility."

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