Second-Gen Covered Call ETFs Surge as Investors Seek Downside Protection

Demand for second-generation covered call exchange-traded funds has surged this year as the KOSPI index rallied sharply in a short period. Investors are seeking strategies that prepare for market corrections while capturing upside momentum. Asset managers predict capital inflows into covered call ETFs will accelerate as market volatility rises amid tensions between the United States and Iran.

According to FnGuide data released on the 3rd, 52 covered call ETFs listed on the Korean stock market held combined net assets of 18.86 trillion won as of the end of last month. Net assets stood at 15.04 trillion won at the end of last year, growing by more than 3 trillion won in just two months.

The growth was driven by covered call ETFs investing in Korean equities, including Samsung Asset Management's "KODEX 200 Target Weekly Covered Call," KB Asset Management's "RISE 200 Weekly Covered Call," and Mirae Asset Global Investments' "TIGER Dividend Covered Call Active."

KODEX 200 Target Weekly Covered Call posted the largest asset growth. Its net assets increased by 1.6 trillion won, or 82.3%, this year to reach 3.54 trillion won at the end of last month. Assets grew by 964.7 billion won in January alone despite fewer trading days due to the Lunar New Year holiday.

The product's appeal stems from its design as a second-generation covered call ETF that addresses the first-generation products' weakness of missing bull market gains. It offers both downside protection during corrections and upside participation during rallies.

Covered call ETFs purchase underlying assets while selling call options to generate stable distribution income during declining or sideways markets. Premium income from selling domestic stock options, which are exchange-traded derivatives, is exempt from taxation and excluded from comprehensive financial income tax.

However, higher call option selling ratios secure more distribution funds but limit participation in rising markets.

Second-generation covered call ETFs have attracted investor interest by reducing call option selling ratios below 100% or adjusting the ratio based on market conditions to meet target distribution rates. The key improvement is enhanced returns during bull markets, even at lower distribution rates than high-ratio covered call ETFs.

As of the end of last month, KODEX 200 Target Weekly Covered Call's cumulative annual distribution rate was 10.48%, lower than RISE 200 Weekly Covered Call ETF's 17.99%. However, year-to-date returns for KODEX 200 Target Weekly Covered Call reached 41.04%, significantly outperforming RISE 200 Weekly Covered Call ETF's 23.71%.

Asset managers expect second-generation covered call ETFs to gain popularity during volatile markets as Korean equity momentum remains intact, supported by improving earnings at major semiconductor companies.

"A temporary market correction is expected due to Middle East tensions," said Lee Dae-hwan, a manager at Samsung Asset Management. "Individual investor net buying will continue into covered call products that partially defend against declines through premium income during corrections while allowing participation when the market rises again."