Covered-call ETFs post double-digit returns as Samsung Electronics tumbles

As volatility in the domestic stock market intensifies, investors are pouring money into covered-call exchange-traded funds that prioritize downside protection. Covered-call ETFs have dominated the top of the weekly return rankings, and analysts say investment options are broadening as second- and third-generation products — designed to capture more upside — continue to hit the market.

According to ETF Check, the data platform run by Koscom, the top-performing domestic ETF over the past week was RISE 200 High-Dividend Covered Call ATM, which posted a return of 13.75 percent. The product combines investment in high-dividend stocks within the KOSPI 200 with a covered-call strategy, delivering strong results amid the volatile market environment.

Other top performers included SOL Financial Holding Plus High Dividend (7.01 percent), Kodex Shareholder Return High Dividend (6.34 percent), Tiger Bank High Dividend Plus TOP10 (6.30 percent), Kodex Financial High Dividend TOP10 Target Weekly Covered Call (6.21 percent) and Plus High Dividend Weekly Covered Call (5.50 percent). Covered-call ETFs combining financial stocks with high-dividend strategies posted relatively stable returns even as the broader market weakened.

Covered-call ETFs work by holding stocks or an index while selling call options — the right to buy the underlying asset at a predetermined price — on those holdings to collect option premiums. While sharp rallies can cap additional gains, the strategy is designed to generate relatively stable returns through option premiums and dividends during sideways or mildly declining markets.

That characteristic is precisely what has drawn growing investor attention. The domestic market has undergone a sharp correction led by the semiconductor sector, significantly widening volatility. The Kospi closed Thursday up 0.62 percent at 7,291.91, but had tumbled 5.35 percent on Wednesday. The losses followed declines of 0.46 percent on Monday and 4.91 percent on Tuesday, with Samsung Electronics and SK hynix falling 6.25 percent and 5.68 percent, respectively, dampening overall market sentiment.

As volatility rises, demand for products that provide steady cash flow has grown. Last month, the Kospi moved more than 4 percent in a single session on 11 of 21 trading days, and swings exceeding 8 percent occurred on three separate occasions. The KOSPI 200 Volatility Index, known as VKOSPI, surged to an intraday high of 97.99 on June 29 — the highest level since the index began tracking in 2009.

Covered-call ETFs coming to market recently have evolved to address the shortcomings of earlier products. First-generation offerings were criticized for capping returns during strong rallies because of their aggressive option-selling structure.

Second- and third-generation products, which have gained popularity recently, address that limitation by using weekly options and adjusting the proportion of options sold to increase participation in rising markets, while still channeling option premiums into monthly distributions.

"The higher the call-selling ratio, the lower the participation in a bull market — that is the upside risk of first-generation covered-call ETFs," said Park Woo-yeol, an analyst at Shinhan Investment. "The second- and third-generation covered-call ETFs that emerged to overcome this limitation are designed to capture gains even in a bull market by using weekly options and adjusting the proportion of options sold."

Market analysts expect investor interest in covered-call ETFs to persist for now, given that elevated volatility is likely to continue, making these products attractive for their ability to target both dividends and option premiums simultaneously. However, they caution that returns can be more limited than those of conventional equity ETFs during sharp market rallies, and that investors should carefully examine a product's structure in light of their market outlook and investment objectives.