Monthly Dividend ETFs Shine as Defensive Shields During Market Crash: 3 Reasons for the Inflow and Investment Precautions
Amidst extreme volatility and consecutive sidecars in the domestic stock market, retail investors are aggressively moving funds into defensive 'Monthly Dividend ETFs'. We analyze the benefits of generating cash flow during a downturn and key precautions for investors.
As the KOSPI index plummets due to geopolitical risks and weakness in US tech stocks, retail investors are moving their funds in droves to 'Monthly Dividend ETFs' to defend against the market downturn. Amidst growing market uncertainty, the investor sentiment to secure a stable cash flow appears to be acting strongly.
3 Key Reasons Behind the Massive Inflow into Monthly Dividend ETFs
Recently, the KOSPI market has experienced extreme volatility, to the point where sidecars (market stabilization mechanisms) have been triggered for 10 consecutive trading days. As a result, retail investors who have lost their direction are turning to defensive assets, with Monthly Dividend ETFs at the center.
- Generating Stable Cash Flow in a Downturn: Even during periods of falling stock prices, investors can receive a constant monthly dividend (distribution), providing psychological comfort and funds for reinvestment.
- Maximizing the Magic of Compounding: By reinvesting the monthly dividends back into the ETF or other high-quality assets, investors can enjoy compounding effects over the long term.
- Diversified Investment Across Various Underlying Assets: With products investing in not just stocks, but also bonds, REITs, and covered calls, diversifying one's portfolio has become easier.
Particularly during market corrections, establishing a 'safety net' through dividend income becomes more crucial than capital gains, further highlighting the appeal of Monthly Dividend ETFs.
Crucial Precautions When Investing in Monthly Dividend ETFs
Monthly Dividend ETFs are not a silver bullet. You must carefully check the following before investing.
- Possibility of Principal Loss: Even if dividends are paid, if the price of the underlying asset falls, the overall return can be negative. Specifically for covered call strategies, gains are capped in a bull market, and there is a risk of principal loss in a bear market.
- Checking the Real Dividend Yield: Rather than blindly investing based on high past yields, you should verify the source of the dividends and whether they can be consistently paid in the future. Some products even distribute dividends by dipping into the principal investment.
- Fees and Taxes: The management fees may be relatively higher compared to regular ETFs, and you must consider that a 15.4% dividend income tax is levied on the monthly distributions received.
Frequently Asked Questions (FAQ)
Q. Why are Covered Call products so popular among Monthly Dividend ETFs?
Covered Call ETFs generate premium income by holding stocks and simultaneously selling call options. In a sideways or mildly declining market, they can pay high levels of distributions using the option premiums, making them highly popular among investors seeking high monthly dividends. However, the downside is that upside potential is capped during rapid stock price rallies.
Q. Is it advantageous to invest through an ISA (Individual Savings Account) or a pension savings account?
Yes, it is highly advantageous. While a 15.4% tax is levied on distributions when investing through a regular account, utilizing tax-advantaged accounts like ISA, pension savings, or IRP can provide tax deferral effects, lower tax rates (3.3~5.5%), or tax exemptions, which are highly effective in boosting your real return rate.