While some investors are concerned that exchange-traded funds with options overlays could limit returns, experts see a key benefit at play.
Morgan Stanley’s global head of ETFs Tony Rochte suggests that hedging strategies like options â serving as a bet against a fund’s equity position â also protect against significant losses.
“They might be capped on the upside, but they’re certainly capping their downside protection as well,” he told CNBC’s “ETF Edge.” “This is really getting people off the sidelines, back into the broad-based equity market.”Â
The risk management strategy is gaining popularity with investors, according to Nasdaq’s head of ETP listings Alison Doyle.
“Over 75% of all ETF launches in 2023 were active. I think most notably within the active ETF space are portfolios that have options-embedded strategies within the portfolios,” she said in the same interview. “Thinking about those 75% of ETFs that were launched last year, 70% were either active equity or equity derivative strategies.”
Morgan Stanley’s Rochte sees more investors moving money out of popular fixed-income products and into risk assets as a result.
“There’s clients who want to re-risk their portfolio. They’re watching the equity market go up. They want to get out of a 5% CD or 5% money market account, and they’re doing it through these options-based strategies, through the Nasdaq and through various other exchanges.”
Nasdaq’s Doyle pointed to covered call ETFs based on the Nasdaq-100 as a popular way for investors to take advantage of strength in Big Tech.
“We’re seeing some managers that will license the Nasdaq-100 index providing that tech exposure with options strategies on top.”
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