Are Covered Call ETFs as Risky as ELS? The Structures Are Fundamentally Different
JEPI: A USD 45 Billion ETF from JPMorgan
From Zero-Day Options to Buffer Strategies
The U.S. exchange-traded fund (ETF) market has grown to nearly USD 8 trillion (approximately KRW 11,000 trillion), roughly 80 times larger than Korea’s rapidly expanding ETF market, which stands at KRW 137 trillion. Given this scale difference, Korea’s ETF market is inevitably sensitive to trends emerging in the U.S. Products that gain traction in the U.S. often find similar success in Korea. Covered call ETFs—currently attracting strong inflows domestically—are a prime example of this phenomenon.
Over the past year, only two active ETFs ranked among the top 20 U.S. ETFs by net inflows: JEPI (JPMorgan Equity Premium Income) and JEPQ (JPMorgan Nasdaq Equity Premium Income). Managed by JPMorgan Asset Management, these ETFs employ covered call strategies based on the S&P 500 and Nasdaq-100 indices, respectively. Over the past year, JEPI attracted USD 8 billion in inflows, while JEPQ gathered USD 8.8 billion. Their total assets now stand at USD 32.4 billion and USD 11.7 billion, respectively—together approaching half the size of Korea’s entire ETF market.
In Korea as well, ETFs using covered call structures have recently come into focus. Currently, 15 covered call ETFs are listed domestically, collectively managing around KRW 2 trillion. While still small—less than 2% of the overall ETF market—their growth has been notable.
In the U.S., covered call ETFs gained prominence after the pandemic as income-generating strategies leveraging the rapidly expanding options market. The same trend is now evident in Korea. Among the top 10 ETFs by dividend yield year-to-date, the top six are all covered call ETFs, reflecting the income generated from call option premiums.
Traditionally, income investing relied on bond coupons or stock dividends. Today, option premium income has emerged as a third source. Because these premiums can be collected monthly, covered call ETFs are well suited as monthly income products. Recently, ETFs such as TIGER U.S. 30-Year Treasury Premium Active (H) and KBSTAR KOSPI 200 Weekly Covered Call have adopted weekly options, whose maturities occur every week, to capture higher premiums.
Understanding the covered call structure explains why these ETFs are gaining attention. The option premium—the source of covered call income—is the price paid for the right to buy or sell an underlying asset at a predetermined strike price on a specified expiration date (in the U.S., typically the third Friday of each month). The seller of a call option—the right to buy—assumes the obligation to sell the underlying asset if the buyer exercises the option, and receives the premium as compensation. Option premiums increase with higher volatility in the underlying asset and with longer time to maturity.
Selling call options exposes the seller to the risk of having to deliver the asset at a lower price if the underlying rises sharply. To eliminate this risk, the seller simultaneously purchases the underlying asset at the outset. The result is a combined position consisting of long exposure to the underlying asset and short exposure to a call option—the essence of a covered call strategy.
Different strategies arise depending on the relationship between the strike price and the underlying asset price at inception. When using at-the-money (ATM) options—where the strike price is close to the current market price—investors earn relatively high premiums but forgo nearly all upside potential. With out-of-the-money (OTM) options—where the strike price is above the current price—investors retain partial upside participation, though at the cost of lower premiums.
Because the underlying asset is held outright, a decline in its price results in losses. However, the monthly option premiums help cushion the downside. When volatility rises, price declines may be larger, but option premiums also increase. Even if the underlying asset does not rebound in a sharp “V-shaped” recovery, continued premium collection over time can gradually reduce losses. This makes covered call ETFs particularly appealing during periods of market uncertainty—and helps explain the popularity of JPMorgan’s JEPI.
As individual investors increasingly favor covered call ETFs, some voices have raised concerns about a potential “second ELS crisis,” citing the use of derivatives. However, risk (volatility) is fundamentally borne when assets are purchased, not when options are sold. Covered call strategies involve selling call options to collect premiums, while buying the underlying asset simultaneously eliminates the risk associated with option exercise. Both transactions occur transparently in regulated exchanges through liquid secondary markets.
Equity-linked securities (ELS), by contrast, are fundamentally different. Their returns depend on predefined conditions tied to the underlying asset’s price, and because they are issued by securities firms, investors must also consider issuer credit risk, including the possibility of default.
The real issue with derivative-based investment products lies in whether they are sold through banks or brokers with adequate explanation and informed consent—so-called mis-selling. Since the Lime Asset Management scandal, Korea’s Financial Consumer Protection Act has significantly strengthened safeguards. Sales of investment products—including ETFs sold through distributors—now require extensive procedures such as recorded explanations and handwritten acknowledgments. While investors who purchase ETFs directly in the stock market are not subject to these procedures, comprehensive disclosures and explanatory materials are readily available. Moreover, since the “Donghak Ant” retail investor movement, educational content on investment products has proliferated across platforms such as YouTube.
To date, all option-based ETFs listed in Korea employ simple covered call strategies, combining physical asset purchases with call option sales. On June 23, Korea Investment Management listed three ETFs using zero-day-to-expiration (0DTE) weekly options, whose maturities occur daily. Compared with the U.S.—where advanced markets offer series of collar or buffer strategies using combinations of synthetic options without holding the underlying asset—Korea’s market remains firmly grounded in conservative structures.
It is true that equity valuations appear stretched amid shifting monetary policy expectations and optimism surrounding AI-driven innovation. This environment helps explain the rising demand for covered call ETFs. Retail investors who buy these products are often well informed, having learned about their structures and trade-offs not only through official disclosures but also through abundant digital content.
Rather than harboring vague fears about financial engineering, a more constructive approach would be to encourage rigorous analysis and thoughtful development—allowing structured investment products like covered call ETFs to evolve in a healthy and transparent manner.