TWSE Market Insights

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Since the listing of Taiwan’s first active ETF last year (2025), the domestic active ETF market has experienced rapid growth in both the number of funds issued and total Assets Under Management (AUM), accompanied by an increasingly diverse array of product types and investment strategies. In recent years, as market volatility intensifies and investors increasingly prioritize stable cash flows, strategies that balance yield generation with risk management have gained significant traction. Among these, the covered call strategy has emerged as a well-established and representative investment approach in international markets and has recently been introduced to domestic active ETFs in Taiwan—making its operational mechanics and risk profile an essential topic for investors to understand thoroughly.

The core principle of a covered call strategy comprises holding an underlying basket of equities (a long cash position) while simultaneously selling corresponding call options to collect option premiums.

In global markets, this strategy has been widely applied across ETF products. Depending on regulatory frameworks and product structure across jurisdictions, the extent to which this strategy is utilized varies. Certain overseas products even apply covered call strategies to their entire equity portfolios, making option premium a primary driver of fund returns. Among the foreign ETFs adopting this approach, JEPI (JPMorgan Equity Premium Income ETF) and JEPQ (JPMorgan Nasdaq Equity Premium Income ETF), both issued by J.P. Morgan Asset Management, are the most representative examples. These ETFs hold thematic or specialized stock portfolios and sell out-of-the-money (OTM) index call options via Equity-Linked Notes (ELNs) to collect option premiums and stock dividends, thereby generating monthly distributable income. In recent years, amid a high interest rate environment and elevated market volatility in the United States, such ETFs offered investors annualized distribution yields ranging from 7% to 11%, attracting tens of billions of U.S. dollars in capital inflows.

When domestic Securities Investment Trust Funds in Taiwan employ covered call strategies, they must comply with relevant regulations, including the "Regulations Governing Securities Investment Trust Funds" and the "Directions for Use by Securities Investment Trust Enterprises of Securities Investment Trust Funds for Trading of Securities-Related Products". In addition to capping the total (nominal) value of un-offset short call options at 25% of a fund’s Net Asset Value (NAV), the framework requires funds to establish internal control systems for measuring high correlation between options positions and underlying security holdings, ensuring the implementation of proper risk monitoring and management controls.

Accordingly, while certain foreign products may write call options covering up to 100% of their portfolio value, Taiwan’s current regulatory ceiling reflects a gradual and balanced policy approach—one that encourages product innovation while prioritizing rigorous risk control and investor protection.

Since April this year (2026), three listed active ETFs adopting covered call strategies have debuted in the Taiwan market. Their investment strategy entails holding a basket of Taiwan equities while selling call options highly correlated with the underlying asset prices, incorporating premiums collected from expired or exercised short call options into the fund's distributable income.

Based on the prospectuses of these ETFs, the profit-and-loss characteristics under different market scenarios are illustrated as follows:

• Bull Scenario (Rising Market): Asset Market Price > Option Strike Price. The option buyer may exercise the option, requiring the fund (as the option seller) to fulfill its obligation. Consequently, the fund captures stock price appreciation only up to the strike price plus the collected premium, placing a cap on potential upside returns beyond the strike price.
• Range-Bound Scenario (Consolidating Market): Asset Market Price ≈ Strike Price (or slightly below). In most cases, the call option will expire unexercised. The fund retains the collected option premium, enhancing overall portfolio yield.
• Bear Scenario (Falling Market): Asset Market Price < Strike Price. The call option typically expires unexercised. The fund retains the collected premium, which serves to partially cushion losses incurred from declining equity prices.

Thus, in addition to diversifying income sources through option premiums, the covered call strategy provides a partial downside cushion during market drawdowns, helping mitigate the impact of market volatility on the portfolio. Conversely, investors must note that during strong market rallies, short call option positions may incur valuation losses, thereby limiting the portfolio’s overall upside potential.

To assist investors in properly understanding the income sources of active Covered Call ETFs, the Taiwan Stock Exchange has enhanced the corresponding information disclosure mechanisms. Effective on July 1 of this year, active ETFs are required to disclose the "percentage breakdown of short call option premiums" within their income distribution announcements on the Market Observation Post System (MOPS), allowing investors to gain a clearer understanding of each component constituting the ETF’s distributions. Furthermore, if an active ETF's distribution includes option premiums, the announcement must explicitly state the fund's distribution policy regarding option premiums, enabling investors to clearly grasp the specific conditions under which such premiums are eligible for payout.

The launch of Covered Call ETFs represents a major milestone in the diversification of Taiwan’s ETF market, providing investors with an innovative tool to generate alternative income streams in volatile market conditions. However, because a covered call strategy essentially trades a portion of potential upside for a more stable income stream, its suitability ultimately depends on an investor's market outlook and risk tolerance. Investors should carefully evaluate whether the characteristics and potential risks of such products align with their individual needs, rather than relying solely on distribution yields as the single criterion for investment decisions.

The Taiwan Stock Exchange will continue to play a pivotal role in fostering market innovation and maintaining effective market oversight. On one hand, we support fund managers in responding to global trends and market demand by introducing diverse ETF types and strategies; on the other hand, through a robust regulatory framework and essential disclosure standards, we ensure that investors participate in a transparent and information-symmetrical environment—jointly driving financial inclusion, product diversification, and a more rational, stable future for Taiwan’s capital markets.