This ETF Trend Helps Investors Manage Risk Exposure
Investors looking to manage their risk exposure are turning to exchange-traded funds (ETFs) with options overlays, despite concerns about limiting returns. However, experts see a major benefit in this popular trend.
Morgan Stanley's global head of ETFs explains that using options as hedging strategies can protect against significant losses. While capping upside potential, these strategies also offer downside protection, which is attracting investors to the broad-based equity market.
Active ETFs with Options Strategies Gain Popularity
The risk management strategy involving options overlays is becoming increasingly popular among investors. According to Nasdaq's head of ETP listings, active ETFs accounted for more than 75% of all ETF launches in 2023. Notably, many of these active ETFs had options-embedded strategies within their portfolios. In fact, approximately 70% of the ETFs launched last year were either active equity or equity derivative strategies.
Investors Shifting from Fixed-Income to Risk Assets
As a result of the growing popularity of options-based strategies, investors are moving their money out of popular fixed-income products and into risk assets. The appeal of re-risking portfolios is driven by the current upward trajectory of the equity market. Clients who previously held 5% certificates of deposit (CDs) or money market accounts are now utilizing options-based strategies and other exchanges to capitalize on market opportunities.
Covered Call ETFs Provide Exposure to Big Tech
One popular way for investors to benefit from the strength of Big Tech is through covered call ETFs based on the Nasdaq-100 index. These ETFs allow managers to license the Nasdaq-100 index and harness options strategies to gain exposure to the tech sector.
As the trend of using options overlays in ETFs continues to gain traction, investors are finding effective ways to manage risk while still capitalizing on market opportunities.
Analyst comment
Positive news: The popular trend of using ETFs with options overlays to manage risk exposure is gaining traction among investors. Experts highlight how these strategies not only protect against significant losses but also encourage more participation in the equity market. This has resulted in a shift of funds from fixed-income products to risk assets. Additionally, covered call ETFs based on the Nasdaq-100 offer a popular way for investors to benefit from the strength of Big Tech. Overall, this trend is expected to continue driving market growth and investor interest.
