Research is often a collective effort. This week, we wanted to highlight some interesting work we’ve come across from our friends in the industry – our midsummer reading list, if you will.
The Latest on Spot Bitcoin ETFs
Spot Bitcoin ETFs may be upon us…sometime ‘soonish.’
We have certainly spilled an enormous amount of ink on this issue, especially since BlackRock’s muscle entered the fight mid-June with an application for a spot Bitcoin ETF. We are now approaching 10 providers in this race, which is now 8 years in the making, and the SEC remains reluctant to bite.
We also have the existing Bitcoin-futures and Bitcoin-related funds that are already navigating the space. They include:
If you are an advisor, you probably need to stay relatively informed so that you can field client questions.
To that end, Ric Edelman, veteran investor, advisor, and author who’s also founder of the Digital Assets Council of Financial Professionals, just published a white paper that may be an interesting resource to you. Titled “What You Need to Know About Spot Bitcoin ETFs,“ the paper explores the history, the current state and the potential future impact of accessing Bitcoin through ETFs.
Consider this: “Only 12% of financial advisors currently recommend Bitcoin to clients, but more than three-fourths of advisors (77%) say they will recommend a spot Bitcoin ETF when they become available,” Edelman says.
“It’s worth noting that two-thirds of the nation’s investors rely on financial advisors for investment recommendations,” he adds, suggesting that a go-ahead from the advisory space could unleash a massive wave of demand. If true, this could be huge because Bitcoin has inelastic, finite supply. It’s that kind of thinking that has many of us in the industry seating on the edge of our seats waiting to see what happens next in this approval race.
For now, Edelman shares his views on what’s at stake, and offers 5 key risks to consider when investing in a spot Bitcoin ETF, whenever they are available. It’s a handy guide that addresses market risk, regulatory risk, operational risk, liquidity risk and tracking risk.
A Little About 0DTE Options
Options seem to be everywhere these days in ETF land. Roughly 20% of ETF launches so far in 2023 have been options-based ETFs.
Broadly speaking, options can serve many roles in a strategy, but in ETF wrappers they are often being implemented to achieve one of two outcomes: income generation or downside protection. (Think, for example, ETF lineups such as YieldMax and Innovator, among many others.)
The single largest actively managed ETF today is an options-based ETF seeking income, JEPI. The fund is nearing $30 billion in assets and its massive asset-gathering success has now several copycats from other providers currently sitting in registration. Options-based ETF investing, as a segment, has serious momentum behind it both in terms of product development and investor demand.
As an advisor, it is important to understand how options work and how they work within ETF portfolios – their benefits and their risks. (We’ve written about the innerworkings of JEPI recently for that reason.) To quote Joshua Wilson, head of advisory group United Ethos, there’s a lot to consider when looking at options-linked ETFs. At a high level, consider for instance:
- The timing of entry and exit from a buffer-type fund, which has a big impact on the upside capture and downside protection levels achieved outside of reset day. “It’s something people often look over.”
- The cost of transacting in the options market, which can vary over time. Price to volatility, time cost – all these variables matter. “With options, there are several variables that stocks don’t have to consider. That’s best understood by remembering that options are nothing more than publicly traded insurance contracts. When fear goes up, costs go up.”
- The risk of poor trading execution for ETFs, which run the risk of seeing rollover of options gamed by the market on expiration. “It’s like an index. Around reconstitution, some stocks benefit and some are hurt by it. If you get ahead of those days and know what big institutions are going to do, you can trade that to your advantage. There can be a gaming of these large positions at rollover period, especially as these ETFs grow very large.”
More granularly, one of the quickly growing areas of the options market is 0DTEs (zero days to expiration options). Cboe Global Markets just released a white paper titled “The Rise of SPX & 0DTE Options” that could be an interesting resource for options research.
Senior Derivatives Analyst Jonathan Zaionz, author of the paper, points out that options volume growth, annually, has more than doubled since 2019 from its earlier stride of 11% annual growth since 2000. That’s largely thanks to the surge in usage in index (SPX) and 0DTE options.
He notes that trading in SPX options neared 3 million contracts a day, on average, in the first half of the year, and more than 40% of that volume was in 0DTEs. “While only accounting for approximately 6% of total options volume traded daily, SPX options represent approximately 33% of total dollars in premium traded, and over 50% of notional exposure traded.”
According to Zaionz: “Initially, options volume growth was the largest in options on single name equities as investors took a liking to stocks such as Tesla, GameStop, and AMC. Since late 2021, several types of investors have shifted their preference away from single stock options to broad based index options such as SPX. Growth in SPX options is more than double that of the rest of the options market since 2020, with a substantial portion of that growth coming from 0DTE trading.”
The white paper is full of interesting data that explores use cases, popular strategies, costs, market impact, benefits, and risks of investing in these options. It’s on our must-read list this summer.
Shout Out to Data Nerds
As a final note, our friend Nick Maggiulli, COO at Ritholtz Wealth Management and author of personal finance blog Of Dollars And Data, released this week his latest data tool: a S&P 500 Historical Return Calculator. You can play with it here: https://ofdollarsanddata.com/sp500-calculator/
This tool allows you to research both nominal and inflation-adjusted returns (with and without dividend reinvestment) for the S&P 500 dating back to 1871.
Maggiulli offers best practices, how-tos and things to consider when playing around with the calculator. It’s a cool little piece of tech that can come in handy when you are looking for that market perspective.
Happy reading!
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