‘Investor adoption of option-based ETFs continues to broaden,’ say JPMorgan analysts
BlackRock is rolling out two new exchange-traded funds that use option strategies, a hot area of the ETF market in the U.S.
The new funds will use a covered-call strategy on U.S. equities, with the iShares S&P 500 BuyWrite ETF IVVW focused on large-cap stocks and the iShares Russell 2000 BuyWrite ETF IWMW targeting small-cap, according to Rachel Aguirre, head of U.S. iShares product at BlackRock. She said in a phone interview that both ETFs will begin trading on Friday.
Investors in the funds may receive monthly income from call-option premiums collected under their strategies, as well as potential price gains from the equity assets they track — up to a certain limit.
There’s “a trade-off” between the income that the new ETFs seek to generate monthly by selling monthly call options on their underlying equity indexes and upside exposure to U.S. stock prices, said Aguirre.
Investors would see the first 1% of potential gains each month from the underlying fund focused on the S&P 500, and the first 2% of price returns each month from the underlying ETF tracking the Russell 2000, she said.
Shares of the iShares Core S&P 500 ETF have risen 1.4% this month through Thursday for a year-to-date increase of 8.3% according to FactSet data. Meanwhile, shares of the iShares Russell 2000 ETF have shed 0.8% in March, for a gain of 0.7% this year through Thursday.
Aguirre said shareholders of BlackRock’s new BuyWrite ETFs, which hold IVV and IWM, would also receive income from quarterly dividends.
“Investor adoption of option-based ETFs continues to broaden, driving strong growth in assets and in the number and variety of products offered,” analysts at JPMorgan Chase & Co. said in a research note Thursday. Assets managed by option-based ETFs listed in the U.S. have surged about 700% over the past three years to around $100 billion across about 300 products, according to their note.
“Call overwriting strategies are the largest segment of options-based ETFs and offer investors income enhancement on an equity portfolio through the monetization of option premia,” the JPMorgan analysts said.
Holders of call options have the right but not the obligation to buy a security at an agreed-upon price by a certain date. The call-option buyer pays the seller a premium for that right.
While “the majority of ETFs in this category write covered calls on the S&P 500 index,” the JPMorgan analysts said there’s also “meaningful activity” on options tied to the Nasdaq and Invesco QQQ Trust Series I .
They cited the JPMorgan Equity Premium Income ETF , which has around $33 billion of assets under management, and the J.P. Morgan Nasdaq Equity Premium Income ETF , with about $11 billion in assets, as examples.
The JPMorgan Equity Premium Income ETF has seen a total return of 5.4% this year through Thursday, while the J.P. Morgan Nasdaq Equity Premium Income ETF has returned 8.4% over the same period, according to FactSet data.
There are 88 ETFs with covered-call strategies in the U.S., most of which are equity funds, according to Aniket Ullal, head of ETF data and analytics at CFRA Research. He said in an email that such funds have $71 billion of assets under management and have attracted $5.9 billion of capital from investors so far in 2024, continuing “the strong inflow trend of last year.”
“Buffer” funds are another kind of option-based ETFs, according to the JPMorgan note.
BlackRock offers buffer ETF strategies, such as the iShares Large Cap Moderate Buffer ETF to give investors some downside protection in the U.S. stock market as well as potential gains with a cap. The asset manager also has other funds that use options strategies, such as the BlackRock Advantage Large Cap Income ETF , and BuyWrite ETFs focused on fixed-income markets.