Model Portfolios | News | Contact
Articles

Monthly Derivative Strategy ETF Commentary

Nov 22, 2023

View all Global X Research Team's ArticlesGlobal X Research TeamGlobal X Research Team

The Global X Research Team is pleased to announce the October 2023 release of the Derivative Strategy ETF Report, in which we seek to examine the continuous growth of derivative-oriented strategies implemented within the ETF structure. The key takeaways below, as well as those highlighted within the report, recap Global X’s classification system for the derivative strategy ETF landscape. They also provide industry-level analysis of derivative strategy ETF investing through an investigation of changes in assets under management (AUM) and fund flows that signify potential trends.

Derivative Strategy ETF Landscape – October 2023 Key Takeaways

  • Assets under management (AUM) of U.S. listed, derivative strategy ETFs rose to $98.75B at the end of October 2023, representing a 1-year growth rate of 72.77%.1 This substantial level of appreciation has been largely supported by strong investor sentiment and interest in covered call strategies. Specifically, the buywrite funds continue to lead the category with approximately $57B in assets.1
  • Monthly inflows for the entire derivative ETF strategy landscape increased from $3.56B in September to approximately $4B in October.2 This increase was likely the result of a change in investor sentiment as investors potentially anticipate an indefinite halt in the Federal Reserve’s rate hiking cycle.
  • Derivative strategy ETFs have experienced a substantial uptick in year-to-date net new assets, amassing $36.6B in new assets since January 1st reflecting a noteworthy 52.5% growth rate.3 This increase coincides with heightened volatility in the fixed income market, likely driven by rising long-term treasury yields. Concurrently, the stock market’s recent gains, predominantly fueled by mega-cap technology companies, may reveal a lack of overall market breadth in the eyes of investors. The growing adoption of collar and buy-write strategies suggests that investors are actively pursuing methods to mitigate volatility while simultaneously boosting income potential.

Category: Articles

Topics: Income Strategies

new windowSave PDF

Related Articles

The Global X Derivative Strategy Classification System is based on the expertise, views, and opinions of the Global X Derivative Strategy Classification Committee and are subject to change. Global X defines thematic investing as the process of identifying powerful disruptive macro-level trends and the underlying investments that stand to benefit from the materialization of those trends. By nature, thematic investing is a long term, growth-oriented strategy, that is typically unconstrained geographically or by traditional sector/industry classifications, has low correlation to other growth strategies, and invests in relatable concepts.

The process to identify a derivative-based strategy incorporates three main principles:

1. The product must utilize derivatives as a core component of its investment strategy. This does not necessarily mean that derivatives must make up the majority of the ETF’s portfolio. However, derivatives must serve a key purpose in achieving the investment objective stated in the ETF’s prospectus.
2. The derivative-based strategy can be utilized over a long-term period from the standpoint that it is able to be used tactically, for temporary exposure to express a market view, or within a strategic allocation. Strategies whose core objective is to be a daily trading tool will most likely not be considered for inclusion.
3. The strategy must use derivatives as a means to achieve 1 or more of the 3 main use cases of derivatives by either buying or selling short a specific type of derivative:

a. Risk Management – These are strategies with an objective of achieving higher risk-adjusted returns by lowering overall portfolio volatility with the usage of derivatives.
b. Income – Strategies that utilize derivatives as a core investment to potentially achieve high income for its investors.
c. Performance Enhancement – Strategies that use derivatives to enhance the upside potential for capital appreciation, typically increasing the economic leverage used within a portfolio.

Taking the above principles into account, it should be noted that the derivative-based classification system does not consist of leveraged/inverse ETFs whose core objective is to track an index that rebalances daily. This goes against the 2nd principle stated above regarding the strategy being a long-term investment. Based on the definitions and principles described above, the derivative-based classification system is organized into multiple layers for a more refined understanding as to the objective of each strategy. Note that some options strategies can be utilized for multiple purposes, whether that be for Income, Risk Management, or Performance Enhancement, resulting in some categories appearing more than one time. The system consists of four layers of classification: (1) Derivative Objective (2) Derivative Strategy (3) Derivative Overlay and; (4) Derivative Tactic.

‘Derivative Objective’ is the broadest layer and this gives an understanding as to the core objective of the fund, utilizing the 3 derivative use cases defined in the Principles section: (1) Risk Management, (2) Derivative Income, and (3) Performance Enhancement. One layer down is ‘Derivative Strategy,’ which will provide investors the means by which the investment objective is being pursued. For example, an ETF that utilizes derivatives with a Risk Management objective can be generated using either a Tail Risk Strategy to provide a level of downside protection or a Collar Strategy to provide a range-bound return outcome. Although slightly different, the commonality between these two overlays are the fact that their core purpose is to provide Risk Management.

Further down, we identify ‘Derivative Overlay’ as a layer describes the specific derivatives being used and the manner in which they are being used (Long or Short, Bull or Bear). For example, a Tail Risk overlay can obtain a level of downside protection using many kinds of derivatives. Some overlays include either “going-long” with put options via a Protective Put or harnessing VIX Futures as an overlay on an existing stock portfolio. Lastly, ‘Derivative Tactic’ help to communicate to investors any unique considerations regarding the options overlay being used. For example, a strategy offering a Synthetic Exposure are primarily meant to be exposure vehicles to. Another example is a Defined-Outcome ETF, which utilizes put spread collars to offer a specific level of downside protection with capped upside potential if held over the course of the stated “outcome-period”, making each iteration different from one another.

The number of derivative objectives, derivative strategies, derivative overlays, and derivative tactics are expected to change as new derivative-based strategies come to market. These updates will be made by the Global X Derivative Strategy Classification Committee (“the committee”) and take into account official fund prospectus filings as well as fund company materials.

The ETF industry is continually innovating to provide unique derivative exposures to investors. The Global X Derivative Strategy Classification Committee evaluates these innovations by first investigating if a fund aligns with the core three principles of what it believes a derivative strategy to be. Then, once a fund is deemed a “Derivative Strategy”, the committee identifies what the core objective is, how this objective is being achieved, and what types of derivative positions are being utilized within the strategy by reviewing prospectuses, index methodologies (if applicable), stated objectives by the fund company, as well as underlying holdings. Once per month, the committee will review all new U.S.-Listed ETF launches to determine if the fund should be added and how it should be classified. In addition, the committee will also review any strategy changes that have occurred amongst existing ETFs within the Classification System that might merit reporting in the next monthly Derivative Strategy ETF Report.

While an ETF may engage in multiple objectives or strategies utilizing derivatives, the committee will determine the classification based on the true nature of the ETF.

While an ETF may be classified within a certain objective, strategy, overlay, or tactic, Global X does not give any assurances that the ETF provides good and accurate exposure to the specific exposure it is targeting. For example, an ETF may convey or market itself in a specific manner but still utilize a specific derivative trading strategy that has its own nomenclature.

The derivative classification system is reviewed monthly by the Global X Derivative Strategy Classification Committee to consider new changes and/or additions to the layers (categories) stated above. In addition, the committee will also seek to add newly launched, U.S.-listed ETFs that fit the 3 main principles of a derivative-based strategy.

In the event that an ETF changes its investment objective to another one that goes against the 3 principles of a derivative-based strategy, the strategy will be removed from the classification system and its historical assets under management data will be maintained within the monthly report. On the other hand, if an ETF changes it investment objective to something that fits within the parameters of the 3 principles, it will be considered for inclusion in the classification system where its AUM will start to be reflected in the report.

Global X accepts requests for reviews or appeals for any ETFs. Please contact Global X at research@globalxetfs.com, and the appeal will be considered in a timely manner. There are no guarantees that an appeal will result in a change in the ETF’s classification.

The Derivative-based ETF Report, including the classification system, falls under the supervision of the Global X Derivative-Based Strategy Classification Committee. The Committee consists of members from Global X’s research and product teams who have extensive knowledge of the strategies themselves and the ETF industry. The goal of the committee is to properly identify and classify ETFs that fit the 3 principles. The Committee meets at least monthly to review the classification system, as well as on an ad-hoc basis to review new ETF launches or ETFs that change their strategy.

No content contained in these materials or any part thereof (“Content”) may be modified, reverse engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of Global X. The Content shall not be used for any unlawful or unauthorized purposes. Global X does not guarantee the accuracy, completeness, timeliness or availability of the Content and is not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content.

THE CONTENT IS PROVIDED ON AN “AS IS” BASIS. GLOBAL X AND ITS AFFILIATES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OF THE CONTENT.

In no event shall Global X or its affiliates be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.”

For more information on Global X, please contact research@globalxetfs.com. For access to Global X Derivative Strategy Classification System – Methodology please click here.

Investing involves risk, including the possible loss of principal. This information is not intended to be individual or personalized investment or tax advice and should not be used for trading purposes. Please consult a financial advisor or tax professional for more information regarding your investment and/or tax situation.