We are fast approaching the end of 2017 and the beginning of a new year. That means portfolio rebalancing and sector rotation among many of the biggest players on Wall Street. Hedge funds, institutional traders and private fund managers are all looking to gain an early edge heading into 2018.
One way to see where these major players are shifting their focus is to look at the popularity of specific exchange-traded funds (ETFs). This year has seen a boom in ETFs, and there are now more of these funds trading on Wall Street than stocks. As such, ETFs have become an excellent barometer by which to measure sector rotation and institutional activity.
Now, you could go sifting through reams of data from each of the major brokerage firms and filing reports from hedge funds and other fund managers to find out what ETFs are seeing increased attention … but by the time you finished digesting that data, 2018 would already be well underway.
An easier way to gain a back-of-the-envelope take on which ETFs are gaining or losing favor is to take a look at options data. Now, the method isn’t perfect, as you can’t tell whether the options were bought or sold, but a higher degree of call options (or bets an ETF will rise) typically denotes a bullish investor bias, with the inverse being so for put option open interest.
Today, we are going to take a look at the most active ETFs among options traders for November. November is a good month in which to test this data, as bigger players make their moves earlier, and December activity is dominated by retail investors, like you and me.
So without further ado…
ETFs to Study for 2018: SPDR S&P 500 ETF Trust (SPY)
With the major market indices in a nearly 10-year bull market, it should come as no surprise that the SPDR S&P 500 ETF Trust (NYSE:SPY) is at the top of November’s most active ETF options. The SPY tracks the performance of the S&P 500 Index, and is a benchmark for a multitude of portfolio managers and institutional traders.
During November, the SPY attracted volume of nearly 78 million contracts, with put options accounting for 63% of the total activity. Put options are typically bets that the underlying equity will fall, and the same is true for the SPY. However, these ETF traders are not necessarily betting against the SPY, so much as they are hedging their broader portfolios.
In other words, many traders buy SPY puts to protect against a market reversal that could devastate their otherwise bullish portfolio holdings. That said, the sharp rise in SPY puts during November could be a signal that many of the big players on Wall Street are more actively hedging a market correction heading into 2018.
With stocks trading at all-time-high levels and breadth of leadership waning, SPY put hedges might be a good idea for anyone to consider as we move into next year.
ETFs to Study for 2018: SPDR S&P Euro Dividend Aristocrats UCITS ETF (SPYW)
The SPDR S&P Euro Dividend Aristocrats ETF (NYSE:SPYW) is a particularly interesting fund. The SPYW tracks the performance of particular high-dividend-yielding equities issued by Eurozone companies. In short, it’s a play on purely European companies with high dividend payouts.
In 2017, dividend strategies were among the most profitable, as companies used global easy-money policies to both buy back stock and increase shareholder payouts. In fact, the world’s largest 1,200 companies distributed a record $328.1 billion in third-quarter dividends.
During November, the SPYW was the second-most-popular ETF for options traders, attracting roughly 27 million contracts. Puts dominated this activity, making up 64% of SPYW’s November volume and hinting that investors are growing more cautious heading into next year.
While SPYW put options can provide hedging insurance for portfolios, the global economic landscape of easy money from central banks indicates that these bets are more than likely bearish in nature. Monetary policies can’t stay low for long, and the U.S. Fed and other have already begun tightening.
While this may not tighten existing dividend payouts, it could certainly constrain them, thus limiting the SPYW’s growth and driving more put volume heading into 2018.
ETFs to Study for 2018: PowerShares QQQ Trust, Series 1 (ETF) (QQQ)
Many of you are likely familiar with the PowerShares QQQ Trust (NASDAQ:QQQ). While not specifically designed as a technology ETF, the “Cubes” is one of the most popular broad-based tech sector trades on Wall Street due to its somewhat lopsided tech weightings — Apple Inc. (NASDAQ:AAPL) is currently the biggest QQQ holding at over 12%.
During November, the QQQ saw an influx of put options volume, with bearish bets making up 66% of the nearly 20 million contracts traded. Unlike the SPY, the QQQ ETF is not utilized as a hedge nearly as much, meaning this rise in put volume is indicative of expected stagnation (put sells) or an outright reversal in tech (put buys).
In fact, November’s heavy put volume on the QQQ is reflected in many of the leading tech firms making up the Cubes. Apple, Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) all sport January 2018 put/call open interest ratios above 1.
If Wednesday’s tech selloff is any indication, the bull tech trade is getting long in the tooth, and these QQQ puts could be a sign that smart money and institutional money is beginning to bet on a rotation out of this sector.
ETFs to Study for 2018: iShares Russell 2000 Index (ETF) (IWM)
The iShares Russell 2000 Index (ETF) (NYSE:IWM) tracks, as you would suspect, the Russell 2000 Index. The ETF tracks small-cap U.S. stocks in a market-cap-weighted fashion that diversifies risk. However, the IWM suffers more from increased rebalancing than its index peers.
Similar to the SPY, the IWM is also typically used as a portfolio hedge, though it is nowhere near as popular as its larger cousin. Case in point, IWM options volume was a mere 19 million contracts in November, less than a third of the SPY’s activity.
That said, IWM puts were just as popular, making up 62% of all of November’s volume. The Russell 2000 is also trading near all-time highs, and has outpaced some of its larger brethren in 2017 in terms of sheer growth. This rapid run has also made the Russell vulnerable to a correction heading into 2018, underscoring the rising popularity of IWM put options among portfolio managers.
ETFs to Study for 2018: iShares MSCI Emerging Markets Indx (ETF) (EEM)
The iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) has been an extremely popular and lucrative ETF in 2017. The fund is one of the oldest on Wall Street that offers exposure to stock markets in emerging economies. EEM is often utilized as a means for exposure to riskier assets in potentially high-growth overseas markets.
That strategy has paid off well this year. Despite solid growth stateside, many emerging markets have offered up considerably better returns. While EEM isn’t the most perfect way to take advantage of this growth — as opposed to country-specific ETFs — it’s coverage of a broad swath of overseas markets makes it considerably popular.
Given the strength of emerging markets in 2017, and the lack of the all-time-highs risk associated with U.S. indexes, I was surprise to see heavy November put volume on EEM. In fact, puts made up 59% of the roughly 12 million contracts traded in November.
That said, EEM is considerably more popular among retail investors than institutional ones, and recent call buying activity suggests that December could be a strong month for call options. In fact, EEM recently saw $8 million worth of bullish call contracts trade — most of which were likely bought to open.
ETFs to Study for 2018: iPath S&P 500 VIX ST Futures ETN (VXX)
The iPath S&P 500 VIX ST Futures ETN (NYSE:VXX) isn’t your typical fund. First, it’s an exchange-traded note (ETN) not an ETF, meaning it tracks an asset like bonds, commodities or futures contracts rather than stocks. In this case, the VXX tracks the infamous CBOE Volatility Index, or the VIX — which is often referred to as the “fear index.”
Both the VXX and the ProShares Ultra VIX Short-Term Futures ETF (NASDAQ:UVXY) track the performance of the VIX, with the UVXY tracking twice the daily return of the VXX — i.e. it’s doubly bullish. But being bullish on the VIX, VXX or UVXY doesn’t mean you are bullish on the market. It means you are betting on a spike in market volatility, and that typically means a market decline.
You can directly trade options on the VIX, but the popularity of ETFs has made both the VXX and UVXY quite popular as alternative investment options. Furthermore, many individual retirement accounts (IRAs) don’t allow VIX trading, but do allow trading ETFs like VXX and UVXY — thus making this ETN and ETF popular among retail investors.
Both the VXX and UVXY were very popular with call traders in November. Calls made up 53% of the 7 million VXX options traded on the month, while 61% of UVXY’s roughly 4 million contracts were calls. Once again, since both these funds track volatility, they are often utilized as hedges against a market correction.
ETFs to Study for 2018: United States Oil Fund LP (ETF) (USO)
The United States Oil Fund LP (ETF) (NYSE:USO) tracks oil. Specifically, the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, according to Morningstar. In short, this is another popular ETF among retail investors for investing in oil via IRAs and other retirement plan funds. But the USO is also quite popular among institutional traders and portfolio managers as a hedge to a broader play on oil prices.
In November, the USO saw options volume rise to about 4.8 million contracts, with puts gaining the upper hand by taking 53% of the total activity. Puts targeting an oil ETF should come as no surprise. Oil prices have struggled to make headway all year, despite OPEC production cuts and the U.S.’s pro oil agenda. Furthermore, China is moving quickly away from fossil fuels, and speeding toward electric vehicles and alternative/green fuel sources.
After a broad rally from mid-year lows, the USO looks to be rolling over once again. With 2018 likely bringing a heavier alternative energy slant, I would expect to see put volume pick up heavily on USO through the end of the year.
ETFs to Study for 2018: SPDR S&P Oil & Gas Explore & Prod. (ETF) (XOP)
Oil doesn’t come out of the ground by itself, and the SPDR S&P Oil & Gas Explore & Producers (ETF) (NYSE:XOP) tracks the performance of the companies that pump these natural resources out of the ground. Houston, Texas-based Carrizo Oil & Gas Inc (NASDAQ:CRZO) is currently the top holding at 3%.
The XOP has suffered a similar fate as USO, which should be expected as lower oil prices directly impact profits for pumping oil out of the ground. That said, XOP options were much more divided during November, with traders eyeing rising natural gas usage versus oil.
Some 4.7 million contracts were traded on XOP in November, with calls and puts split right down the middle. Activity appears also to be divided between bets that oil and gas producers will see a resurgence heading into 2018, and bets against oil prices. In fact, natural gas’ rising popularity is the one bullish factor supporting XOP, and will likely continue to drive call activity on the fund going forward.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.