Covered Call ETF Net Assets Surge 4.8 Times... FSC Issues 'Consumer Alert'

383.6% Increase in 6 Months Compared to End of 2023
Net Asset Size Surpasses 3.7 Trillion Won
"Not a Product Guaranteeing Fixed or Additional Returns"

Financial Supervisory Service, Yeouido, Seoul. Photo by Younghan Heo younghan@

The net assets of covered call exchange-traded funds (ETFs) exceeded 3.7 trillion KRW, nearly quintupling in the past six months, prompting the Financial Supervisory Service (FSS) to issue a "consumer alert" on the 28th.

Covered call products generate distribution (monthly dividend) funds by selling options, which involves giving up the opportunity for the underlying asset's value to rise. Covered call ETFs targeting a 12% distribution rate based on long-term U.S. Treasury bonds are representative examples.

According to the FSS, the net assets of covered call ETFs reached 3.7471 trillion KRW as of the end of June 2024, a 383.6% increase over 774.8 billion KRW at the end of 2023. This is 4.8 times the previous amount.

The FSS emphasized that the distribution rate levels used in the names of covered call ETFs are targets set by asset managers for each product and are not pre-agreed guaranteed returns. For example, investing 10,000 KRW in a covered call ETF targeting a 12% annual distribution might be mistakenly perceived as a guaranteed 1,200 KRW annual dividend, but in reality, if the ETF’s net asset value (NAV) continuously declines, the annual distribution could drop to as low as 919 KRW.

Furthermore, the distribution is explained as compensation for giving up the underlying asset’s appreciation, not as additional income beyond the asset’s value increase. The distribution is not a product that guarantees extra returns compared to other financial products in exchange for foregoing the underlying asset’s gains.

Additionally, the FSS pointed out that covered call ETFs limit profits from the underlying asset’s rise but fully reflect losses from its decline, making it an investment product that requires investors’ special caution. Recently, some products have increased the proportion of option sales to pay higher distribution rates, further limiting the potential for the underlying asset’s appreciation or using underlying assets with high volatility.

The FSS warned that if the underlying assets of the ETF portfolio and the underlying assets of the options differ, volatility could increase further. For example, in a covered call ETF launched by Company A, the portfolio’s underlying assets are 10 technology stocks, but the underlying asset for the sold options is the Nasdaq 100 index, which is different.

The FSS also urged special caution regarding "finfluencers" on social networking services (SNS) who are not registered financial professionals under financial law, noting that their financial product knowledge and experience have not been verified.

The FSS stated, "We will do our utmost to prevent investors from misunderstanding ETF names and profit structures and to ensure that investment risks are thoroughly disclosed."