Hantoo Asset Management "Covered Call ACE ETF, Continuous Net Buying by Individuals Since Listing"

Korea Investment Trust Management announced on the 8th that individual net buying of its three covered call exchange-traded funds (ETFs), which were listed last month, continues.

The three covered call ETFs are △ ACE US 500 15% Premium Distribution (Synthetic) △ ACE US Semiconductor 15% Premium Distribution (Synthetic) △ ACE US Big Tech 7+ 15% Premium Distribution (Synthetic). They are characterized by aiming to pay an annual distribution of up to 15%. Individual investors have been net buyers for nine consecutive trading days from the listing date on the 23rd of last month through the previous day (7th).

The product with the largest individual net buying was the ACE US 500 15% Premium Distribution (Synthetic) ETF (total individual net buying amount of 13.8 billion KRW). This product simultaneously buys stocks of 500 leading US companies while selling call options on the SPDR S&P 500 ETF (SPY ETF), which tracks the S&P 500 index.

The call options used for selling are zero-day-to-expiration (0DTE) out-of-the-money (OTM) 1% options. By using 0DTE options that expire within 24 hours and OTM options that partially track market performance, the annual target distribution rate was increased.

Typically, option premiums tend to be larger the longer the expiration period. However, Korea Investment Trust Management's analysis of past data (from November 2022 to November 2023) showed that the total premiums received daily were higher than the monthly option premiums during the same period. Additionally, through the OTM 1% options, up to 1% of the daily return of the underlying asset can be reflected in the portfolio performance beyond the call option premium.

Following the ACE US 500 15% Premium Distribution (Synthetic) ETF, the ACE US Big Tech 7+ 15% Premium Distribution (Synthetic) ETF (10.8 billion KRW) and the ACE US Semiconductor 15% Premium Distribution (Synthetic) ETF (5.5 billion KRW) showed high individual net buying.

Both the ACE US Big Tech 7+ 15% Premium Distribution (Synthetic) ETF and the ACE US Semiconductor 15% Premium Distribution (Synthetic) ETF employ a strategy of selling call options on the QQQ ETF, which tracks the Nasdaq 100 index. The call option selling strategy is the same as that of the ACE US 500 15% Premium Distribution (Synthetic) ETF (0DTE OTM 1%). However, the underlying assets differ, consisting of US-listed big tech companies on Nasdaq and US-listed semiconductor companies, respectively.

Another advantage of the three ACE ETFs is their ‘mid-month distribution.’ Unlike most monthly dividend products listed domestically that pay dividends at the beginning of the following month based on the end of the month, the three ACE ETFs pay dividends around the 15th of each month. This reflects the demand of investors who want to generate stable cash flow even during the month.

Nam Yong-su, Head of ETF Management at Korea Investment Trust Management, explained, "Covered call ETFs can incur losses if the decline in the underlying asset exceeds the option premium, so the underlying asset is important. We judged that the three ACE ETFs, which aim for a high annual distribution rate, are effective with indices that trend upward over the long term."

He added, "It seems that investors have shown great interest in the 0DTE OTM 1% call option selling strategy and the mid-month distribution strategy, which were used to partially overcome the upside limitation of existing covered call products."

Meanwhile, all three ACE ETFs are performance dividend-type products, so principal loss may occur depending on management results. Also, the results of receiving 0DTE option premiums may vary depending on market conditions.