We’ve talked earlier than about how exchange-traded funds (ETFs) signify an environment friendly device for gaining fast entry to various kinds of belongings or funding exposures. We’ve additionally mentioned how choices have change into more and more fashionable lately.
As we speak, we mix each matters and have a look at ETFs that embody choices. We see that it’s a rising section of the ETF panorama.
ETFs with choices give completely different returns to a inventory portfolio
Choices work a bit otherwise than equities. Choices expire — generally within the cash, generally not — making their returns not “linear.” As well as, choices will be:
- Held individually (single leg).
- Mixed with different choices (multi-leg).
- Mixed with underlying fairness exposures (overlay).
This can be utilized to create portfolios with completely different payoffs, like extra earnings or draw back safety.
ETFs with choices have been rising
As the information under exhibits, belongings into possibility overlay ETFs have elevated considerably since 2020, when markets skilled a pointy sell-off across the COVID-19 pandemic.
Previous to 2020, mixture belongings underneath administration (AUM) on this class was round $5 billion. As we speak, those self same kinds of methods signify over $160 billion, with the majority of belongings invested in both enhanced earnings or hedging methods (extra on the variations later).
Chart 1: Property in possibility overlay ETFs
In actual fact, once we have a look at annual ETF launches, we see that possibility overlay funds have typically represented between 20% to 30% of latest fairness ETF launches since 2019 (Chart 2).
Chart 2: Choice overlay ETF launches
What possibility overlays are the most well-liked?
Not all possibility overlay methods are the identical. Choices will be mixed collectively in a portfolio to focus on a pre-defined end result. In Chart 3, we group funds in accordance with Nasdaq’s in-house fund taxonomy:
- Enhanced Earnings Methods (Inexperienced) primarily attempt to enhance earnings. That is sometimes executed by writing, or promoting, choices to obtain premium earnings along with lengthy fairness publicity (e.g., coated name like QYLD or put-write like WTPI).
- Hedging Methods (Orange) primarily goal to guard draw back whereas offering some upside participation through lengthy put choices, and brief name choices (e.g., conventional buffer funds like PDEC and FNOV, or 100% draw back safety funds like TJUL).
- Enhanced Efficiency (Blue) attempt to outperform a benchmark by way of elevated earnings (e.g., OVL, or SPYC).
As of March 2025, we tallied over 430 fairness ETFs with choices, representing over $160 billion in whole AUM. Nevertheless, as we are able to see under, the earnings and hedging methods signify nearly the entire whole belongings within the house.
Chart 3: Choice overlay ETFs by strategic focus
How do they work?
Every overlay technique is usually some mixture of lengthy and brief positions in name and put choices, all producing barely completely different outcomes. The diagrams under present how the mix of inventory publicity (diagonal line) and choices exposures (“hockey sticks”) mix an indicative portfolio return profile that’s “not linear” (the blue line isn’t straight).
Chart 4: Hypothetical payoffs of various kinds of possibility overlays
The diagrams above present how a number of the fashionable overlay methods work. Notice that there’s normally a trade-off to supply these returns. The blue line is typically above the diagonal inventory returns (higher), and generally under it (worse).
The advantages of every are additionally completely different:
- Lined name – generate earnings with restricted upside.
- Protecting put – totally shield draw back however take part in upside.
- Conventional buffer fund – buffer draw back (as much as a sure level) and produce some upside fairness participation.
- 100% draw back safety (or collars) – just like conventional buffer funds, besides draw back is totally protected.
A deeper dive into coated calls and protecting places
The first option-overlay ETF within the U.S. market was the Invesco S&P 500 Purchase/Write ETF (PBP), which implements a coated name technique on the S&P 500.
A coated name sometimes has two positions:
- Lengthy fairness publicity – merely put, the worth of the place goes up or down 1-to-1 with the underlying inventory worth.
- Brief name possibility – assuming the place is held to expiration, if the inventory worth is lower than the strike worth, the place retains premium. In any other case, the place loses worth.
The premium earned from promoting the decision helps the mixed portfolio beat a easy inventory fund, despite the fact that the mixed publicity (blue line) nonetheless falls as inventory costs fall. Nevertheless, as soon as the brief name is “within the cash,” train payouts of the choice are offset (coated) by good points on the inventory. The upside is capped by the brief name strike.
A protecting put alternatively works like insurance coverage in opposition to the inventory portfolio falling (under the strike worth). The mixed portfolio nonetheless offers publicity to upside, however the price of the choice (premium) reduces the return in comparison with a easy inventory place (the blue line falls under the lengthy inventory line).
Chart 5: Lengthy fairness + single possibility
General, there are about 70 kinds of U.S. funds implementing coated call-like methods with almost $90 billion in whole belongings underneath administration (AUM).
A deeper dive into buffer methods
Buffer methods are usually barely extra advanced with a number of layers of choices. Buffer methods goal to offer draw back safety and a few upside seize.
There are sometimes 4 main parts of a conventional buffer technique, and Chart 6 under illustrates every of the steps sequentially (notice that the darkish blue line represents the online payoff profile for every stage):
1. Set up Fairness Publicity – both by going lengthy the index or shopping for a deep in-the-money name possibility.
2. Set the “Cap” – by promoting an out-of-the-money name possibility. This establishes the “cap,” or the restrict to how a lot upside return the technique can obtain.
Set the buffer vary by:
3. Lengthy Put Choice – establishes the beginning of the buffer.
4. Brief Put Choice – establishes the top of the buffer and in addition partially funds the draw back buffer.
Chart 6: create a buffer
General, Step 4 in Chart 6 highlights the anticipated payoff when combining all parts. Although, we should always notice that the realized payoff might deviate from the anticipated payoff proven above relying on different elements, corresponding to when an investor buys or sells the technique relative to the beginning and finish of the outlined end result interval.
The key trade-off is the upside potential vs. draw back safety. The buffer technique can solely earn a return as much as the cap, so if the reference asset exceeds the cap, the buffer technique will underperform.
Regardless of the potential underperformance in “up” markets, traders should still be drawn to buffer methods as a consequence of their capability to restrict draw back at a decrease value than merely “shopping for a put,” due to promoting of different choices within the mixture to earn again some premium.
Notice that, typically, buffer methods have traditionally outperformed underlying benchmarks during times of market stress. For instance, Chart 7 under highlights the rolling drawdown of a set of buffer methods from 2020 to the current, relative to the Nasdaq-100® (NDX®) and S&P 500. It exhibits that the gray space falls lower than a easy inventory portfolio (dots).
Chart 7: Rolling drawdown of buffer funds
Who’s managing these ETFs?
Curiously, the vast majority of belongings are managed by only some ETF issuers (Chart 8):
- J.P. Morgan is the most important issuer, with round $65 billion in belongings and the 2 largest ETFs (JEPQ and JEPI).
- They’re adopted by First Belief and Innovator ETFs, each of which focus rather more on draw back protected (orange) methods.
- Though World X, Amplify and Neos have fewer ETFs, their suites embody a number of the hottest ETFs with choices (QYLD, XYLD, DIVO and SPYI).
Chart 8: High ETF issuers of possibility overlays
Why this issues
Choice methods will be tailor-made to satisfy various kinds of outlined outcomes. ETFs with choices make it straightforward for traders to entry a few of these extra sophisticated methods.
Nevertheless, as a result of a lot of these methods are advanced, they is probably not for everybody. As at all times, it’s essential for traders to know what they’re shopping for to keep away from any undesired outcomes.
General, possibility overlay methods signify simply one other instance of how developed the U.S. markets have change into.
We’ve talked earlier than about how exchange-traded funds (ETFs) signify an environment friendly device for gaining fast entry to various kinds of belongings or funding exposures. We’ve additionally mentioned how choices have change into more and more fashionable lately.
As we speak, we mix each matters and have a look at ETFs that embody choices. We see that it’s a rising section of the ETF panorama.
ETFs with choices give completely different returns to a inventory portfolio
Choices work a bit otherwise than equities. Choices expire — generally within the cash, generally not — making their returns not “linear.” As well as, choices will be:
- Held individually (single leg).
- Mixed with different choices (multi-leg).
- Mixed with underlying fairness exposures (overlay).
This can be utilized to create portfolios with completely different payoffs, like extra earnings or draw back safety.
ETFs with choices have been rising
As the information under exhibits, belongings into possibility overlay ETFs have elevated considerably since 2020, when markets skilled a pointy sell-off across the COVID-19 pandemic.
Previous to 2020, mixture belongings underneath administration (AUM) on this class was round $5 billion. As we speak, those self same kinds of methods signify over $160 billion, with the majority of belongings invested in both enhanced earnings or hedging methods (extra on the variations later).
Chart 1: Property in possibility overlay ETFs
In actual fact, once we have a look at annual ETF launches, we see that possibility overlay funds have typically represented between 20% to 30% of latest fairness ETF launches since 2019 (Chart 2).
Chart 2: Choice overlay ETF launches
What possibility overlays are the most well-liked?
Not all possibility overlay methods are the identical. Choices will be mixed collectively in a portfolio to focus on a pre-defined end result. In Chart 3, we group funds in accordance with Nasdaq’s in-house fund taxonomy:
- Enhanced Earnings Methods (Inexperienced) primarily attempt to enhance earnings. That is sometimes executed by writing, or promoting, choices to obtain premium earnings along with lengthy fairness publicity (e.g., coated name like QYLD or put-write like WTPI).
- Hedging Methods (Orange) primarily goal to guard draw back whereas offering some upside participation through lengthy put choices, and brief name choices (e.g., conventional buffer funds like PDEC and FNOV, or 100% draw back safety funds like TJUL).
- Enhanced Efficiency (Blue) attempt to outperform a benchmark by way of elevated earnings (e.g., OVL, or SPYC).
As of March 2025, we tallied over 430 fairness ETFs with choices, representing over $160 billion in whole AUM. Nevertheless, as we are able to see under, the earnings and hedging methods signify nearly the entire whole belongings within the house.
Chart 3: Choice overlay ETFs by strategic focus
How do they work?
Every overlay technique is usually some mixture of lengthy and brief positions in name and put choices, all producing barely completely different outcomes. The diagrams under present how the mix of inventory publicity (diagonal line) and choices exposures (“hockey sticks”) mix an indicative portfolio return profile that’s “not linear” (the blue line isn’t straight).
Chart 4: Hypothetical payoffs of various kinds of possibility overlays
The diagrams above present how a number of the fashionable overlay methods work. Notice that there’s normally a trade-off to supply these returns. The blue line is typically above the diagonal inventory returns (higher), and generally under it (worse).
The advantages of every are additionally completely different:
- Lined name – generate earnings with restricted upside.
- Protecting put – totally shield draw back however take part in upside.
- Conventional buffer fund – buffer draw back (as much as a sure level) and produce some upside fairness participation.
- 100% draw back safety (or collars) – just like conventional buffer funds, besides draw back is totally protected.
A deeper dive into coated calls and protecting places
The first option-overlay ETF within the U.S. market was the Invesco S&P 500 Purchase/Write ETF (PBP), which implements a coated name technique on the S&P 500.
A coated name sometimes has two positions:
- Lengthy fairness publicity – merely put, the worth of the place goes up or down 1-to-1 with the underlying inventory worth.
- Brief name possibility – assuming the place is held to expiration, if the inventory worth is lower than the strike worth, the place retains premium. In any other case, the place loses worth.
The premium earned from promoting the decision helps the mixed portfolio beat a easy inventory fund, despite the fact that the mixed publicity (blue line) nonetheless falls as inventory costs fall. Nevertheless, as soon as the brief name is “within the cash,” train payouts of the choice are offset (coated) by good points on the inventory. The upside is capped by the brief name strike.
A protecting put alternatively works like insurance coverage in opposition to the inventory portfolio falling (under the strike worth). The mixed portfolio nonetheless offers publicity to upside, however the price of the choice (premium) reduces the return in comparison with a easy inventory place (the blue line falls under the lengthy inventory line).
Chart 5: Lengthy fairness + single possibility
General, there are about 70 kinds of U.S. funds implementing coated call-like methods with almost $90 billion in whole belongings underneath administration (AUM).
A deeper dive into buffer methods
Buffer methods are usually barely extra advanced with a number of layers of choices. Buffer methods goal to offer draw back safety and a few upside seize.
There are sometimes 4 main parts of a conventional buffer technique, and Chart 6 under illustrates every of the steps sequentially (notice that the darkish blue line represents the online payoff profile for every stage):
1. Set up Fairness Publicity – both by going lengthy the index or shopping for a deep in-the-money name possibility.
2. Set the “Cap” – by promoting an out-of-the-money name possibility. This establishes the “cap,” or the restrict to how a lot upside return the technique can obtain.
Set the buffer vary by:
3. Lengthy Put Choice – establishes the beginning of the buffer.
4. Brief Put Choice – establishes the top of the buffer and in addition partially funds the draw back buffer.
Chart 6: create a buffer
General, Step 4 in Chart 6 highlights the anticipated payoff when combining all parts. Although, we should always notice that the realized payoff might deviate from the anticipated payoff proven above relying on different elements, corresponding to when an investor buys or sells the technique relative to the beginning and finish of the outlined end result interval.
The key trade-off is the upside potential vs. draw back safety. The buffer technique can solely earn a return as much as the cap, so if the reference asset exceeds the cap, the buffer technique will underperform.
Regardless of the potential underperformance in “up” markets, traders should still be drawn to buffer methods as a consequence of their capability to restrict draw back at a decrease value than merely “shopping for a put,” due to promoting of different choices within the mixture to earn again some premium.
Notice that, typically, buffer methods have traditionally outperformed underlying benchmarks during times of market stress. For instance, Chart 7 under highlights the rolling drawdown of a set of buffer methods from 2020 to the current, relative to the Nasdaq-100® (NDX®) and S&P 500. It exhibits that the gray space falls lower than a easy inventory portfolio (dots).
Chart 7: Rolling drawdown of buffer funds
Who’s managing these ETFs?
Curiously, the vast majority of belongings are managed by only some ETF issuers (Chart 8):
- J.P. Morgan is the most important issuer, with round $65 billion in belongings and the 2 largest ETFs (JEPQ and JEPI).
- They’re adopted by First Belief and Innovator ETFs, each of which focus rather more on draw back protected (orange) methods.
- Though World X, Amplify and Neos have fewer ETFs, their suites embody a number of the hottest ETFs with choices (QYLD, XYLD, DIVO and SPYI).
Chart 8: High ETF issuers of possibility overlays
Why this issues
Choice methods will be tailor-made to satisfy various kinds of outlined outcomes. ETFs with choices make it straightforward for traders to entry a few of these extra sophisticated methods.
Nevertheless, as a result of a lot of these methods are advanced, they is probably not for everybody. As at all times, it’s essential for traders to know what they’re shopping for to keep away from any undesired outcomes.
General, possibility overlay methods signify simply one other instance of how developed the U.S. markets have change into.
