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ETFs tied to stock market options transform market dynamics

Posted:Dec 12, 2023 13:36 Category: Americas , Europe , Fintech , Forex , Posted by
Lea Hogg

Investors in search of reliable income streams have injected nearly US$ 26 billion into exchange-traded funds (ETFs) tied to stock options this year, sparking a surge of interest and prompting reflections on their potential influence on market dynamics.

Near-triple growth

Known as covered call ETFs, these funds have experienced a remarkable ascent in popularity, boasting a combined asset size of approximately US$ 59 billion—a striking surge from a mere US$ 3 billion just three years ago. The category has witnessed a near-triple growth in the number of ETFs, with approximately 60 now available in the US.

“The retail ETF investor sentiment has shifted towards income-focused and options-based products,” notes Dave Mazza, Chief Strategy Officer at Roundhill Investments. The firm, redirecting its strategy away from meme stocks, is poised to launch three covered call ETFs in the near future.

Largest actively-managed EFT

Covered call ETFs, functioning as baskets of securities traded on exchanges, have become an appealing avenue for investors. These funds sell options on underlying equity holdings, generating income through premiums while also mitigating the extent of potential gains and losses. Traditionally perceived as a defensive strategy, they have flourished in a year marked by a booming US market.

A significant portion of the inflow into covered call ETFs this year is directed towards the US$ 30 billion JPMorgan Equity Premium Income ETF (JEPI), an S&P 500-focused product that has ascended to become the largest actively managed ETF. Concurrently, an additional US$ 13.7 billion has been invested in a second JPMorgan covered call product and a third from Global X, both centered around the Nasdaq Composite index.

In pursuit of stable returns

Investors have funnelled nearly US$ 26 billion into covered call ETFs, transforming market dynamics and prompting scrutiny of their impact on volatility.

This surge reflects a noteworthy shift in retail ETF investor sentiment towards income-focused and options-based products, exemplified by the remarkable ascent of these funds from US$ 3 billion to US$ 59 billion in assets over the past three years

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