What Is the Covered Call Behind 00406A's Counter-Trend Subscription Surge?

00406A has experienced consecutive days of counter-trend subscriptions, successfully surpassing 00407A in issuance size!

The chart on the lower left shows changes in returns on August 27; the chart on the lower right displays daily net subscription/redemption statistics. Over the past five days, actively managed ETFs have seen clear net redemptions, while 00406A has attracted counter-trend subscriptions.

As previously analyzed, the reason for net redemptions in active ETFs is that overlapping holdings have inflated the P/E ratios of large and mid-cap AI stocks. The massive issuance of 00403A drained liquidity in one go, consuming future funds prematurely, followed by a wave of margin call liquidations. These two factors have caused active ETFs to buy high and sell low in this cycle, resulting in overall net redemptions for mainstream ETFs despite the market rebound.

While politics remains politics, corporate bonds are competing for capital, and the U.S. government is instead supporting financing for the AI supply chain.

The primary reason 00406A is attracting capital counter-trend, according to our center, is its monthly dividend and high dividend yield. The annualized yield based on the August dividend is 17.6%—this astonishing figure serves as the best marketing message for capital inflows. This high annualized yield comes from dividend income, capital gains, and option premium income. The third component is the key difference compared to active ETFs (see lower left chart). Therefore, 00406A’s net subscriptions are not only due to its own appeal but also generate short-term capital shifts that partially reduce index and market volatility, as part of its holdings consist of covered calls!

A covered call strategy combines holding long futures positions or physical stocks with selling call options (Sell Call), as shown in the upper right chart. There’s no free lunch—this high dividend comes from option premium income, at the cost of capping upside potential during sharp market rallies.

Looking deeper into 00406A’s actual investment portfolio composition, examining the ratio and actual positions of Sell Call:

Actual holdings of 00406A

Futures and options positions forming Sell Call (see table below)

It still holds physical stocks in AI-related equities similar to active ETFs, with highly overlapping holdings and little innovation, as shown in the table below:

Therefore, equity weight is approximately 84%, long futures and sell call positions equivalent to covered call account for about 22% (net exposure 0–1%), with the remainder in cash—8.5% being usable net cash in the stock account, and 8.3% in margin for futures and options, which should be considered as a group with Sell Call.

In summary:

00406A can be viewed as 0.8 × a regular active ETF + 0.2 × Sell Call. Its long-term returns are not expected to differ significantly from popular active ETFs like 00403A, 00981A, and 00991A. The main differences are time-specific, becoming apparent only during short-term bullish periods with strong weekly green candles.

(Authored by Fan Zhenfeng, Analyst, Yongcheng Asset Management)

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