Korea's covered call exchange-traded fund (ETF) market is expanding rapidly, but criticism is mounting that the lack of a uniform standard for distribution yields — one of the key metrics — is increasing investor confusion, as each asset manager applies its own calculation method. Some products highlight high figures by simply annualizing the most recent month's distribution, while others use a trailing 12-month cumulative basis, making it difficult to compare ETFs of the same type.
According to the Korea Exchange on Tuesday, net assets of domestic covered call ETFs totaled 23.73 trillion won as of the previous trading day (Monday). That marks a roughly 58% surge from 15.04 trillion won at the end of last year. While a semiconductor-led bull market has continued both at home and abroad, demand has also been rising from investors seeking stable cash flow as a hedge against volatility.
The problem is that distribution yield formulas are not standardized across asset managers, which can cause significant confusion. The market currently uses a mix of approaches: annualizing the most recent month's distribution, dividing cumulative distributions actually paid over the past year by the net asset value, or disclosing only the actual distribution rate for the current month. This makes meaningful comparisons between products difficult for investors.
Indeed, each firm discloses and markets ETF distribution yields differently. Earlier this year, Mirae Asset Global Investments prominently featured a "1.93% current-month distribution yield" for its TIGER Dividend Covered Call Active ETF, while KB Asset Management emphasized an 18.10% trailing 12-month cumulative annual distribution yield for its RISE 200 Weekly Covered Call ETF. Korea Investment Management had previously embedded a specific target distribution yield in the product name of its ACE US 500 15% Premium Distribution (Synthetic) ETF, but changed the name in 2024 to ACE US 500 Daily Target Covered Call (Synthetic), considering the potential for investor misunderstanding.
Unlike conventional dividend ETFs, covered call ETFs hold underlying assets while simultaneously selling call options, using the resulting option premiums as the source of distributions. The issue is that during periods of heightened volatility, option premiums can temporarily surge, pushing up distribution amounts for specific months. Simply annualizing such figures can create an illusion of yields far higher than what is actually sustainable over the long term. Moreover, if the distribution yield exceeds the gains in the underlying index or the fund's returns for an extended period, it can lead to a "self-cannibalizing" structure in which distributions are effectively paid out of principal.
The United States uses a standardized metric called the "30-Day SEC Yield," based on Securities and Exchange Commission (SEC) guidelines. It is calculated by subtracting expenses from net investment income (NII) generated over the past 30 days and annualizing the result using a prescribed formula. While option premiums and capital gains from covered call ETFs are reflected only in a limited way — sometimes causing the figure to appear lower than the actual distribution yield — all ETFs use the same standard, making comparisons between managers relatively straightforward. The U.S. also requires separate disclosure of whether distribution sources are option premiums, capital gains, or return of capital (ROC).
Industry voices are calling for at least a minimum uniform standard for calculating distribution yields, regardless of which products stand to benefit. "For newly listed products, their track record is short, so simple annualization is unavoidable to some extent," a senior official at one asset management firm said. "But if there were a standardized benchmark, it would make comparisons between products far easier and also align with the policy direction of protecting financial consumers."
