ETFs With The Most Liquid Options

A lot of assets under management doesn't always correspond to a deep and liquid options market.

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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

For many investors, options are an important tool for hedging. If done right, just a small position in options can help manage an investor's portfolio risk. Others use options as a speculative tool, buying calls and puts to bet on the direction of an individual security or market (calls increase in value when a security rises; puts increase in value when a security declines). 

Puts, in particular, are in high demand today with the U.S. stock market in a bear market. By buying puts on an ETF they own, an investor can offset some of the losses they’d experience if that ETF were to decline.  

However, options have a cost (called a premium), so that protection doesn’t come for free. They’re only suitable for investors who are willing to bear that cost in return for the protection that options can provide.  

In any case, options provide the ability to make more sophisticated bets on markets. While it’s not something that's useful to everyone, options trading does appeal to many. 

Large AUM Doesn't Mean Liquid Options 

Just as with individual stocks, options are available in the ETF world. Most exchange-traded products have options available to trade, but not all of them are liquid. 

A seldom-traded ETF will naturally have an illiquid options market, if it has one at all. On the other hand, a popular ETF will tend to have a liquid options market, but not always. 

Take the iShares Core S&P Mid-Cap ETF (IJH), for example. It's the largest midcap ETF, with a massive $57 billion in assets. Yet its options market is tiny, with a total open interest of a paltry 8,447 contracts, according to Bloomberg data. (Each contract gives the owner the right to 100 shares of the underlying ETF, the right to buy in the case of calls and the right to sell in the case of puts.) 

The smaller, but still sizable, SPDR S&P Midcap 400 ETF Trust (MDY), with $17 billion in assets, has a more active options market, with open interest of 21,498. 

Yet it's still a stretch to call MDY's options liquid when compared against some other ETFs.  

Midcap ETFs simply isn’t an area where options traders are focused; thus, a vibrant options market hasn't developed there. Most of the $74 billion in IJH and MDY is likely long-term money that has little need for options trading. 

Deepest Options Market 

Midcaps aside, there are plenty of other exchange-traded funds with robust options markets. Unsurprisingly, the world's largest and most popular ETF in the world, the $358 billion SPDR S&P 500 ETF (SPY), is among those. 

SPY is, in fact, the ETF with the deepest options market in the world. Currently, there are an incredible 18.4 million options contracts outstanding on the fund—also called open interest. Bid/ask spreads on SPY options are often no more than a penny wide, minimizing transaction costs for those who want to hedge or speculate on the S&P 500. 

Here are the top five ETFs with the most liquid options. (For full list of the top 20, see the table at the end of the article.) 

 

FundTickerAUM ($million)Open Interest
SPDR S&P 500 ETF TrustSPY 357,97518,350,856
Invesco QQQ Trust Series 1QQQ 167,39010,401,326
iShares Russell 2000 ETFIWM 52,5527,275,251
iShares iBoxx High Yield Corporate Bond ETFHYG 14,2056,520,730
iShares MSCI Emerging Markets ETFEEM 25,7175,538,970

 

Even though SPY is the largest ETF with the most liquid options market, that correlation doesn't always hold true. There are many big funds with illiquid or even nonexistent options markets. 

Take the $258 billion Vanguard S&P 500 ETF (VOO). The second largest ETF by assets only has total options open interest of 78,420. That's nothing for a fund of that size. Compared with SPY, bid/ask spreads for VOO options are huge, making the fund a poor choice for options traders. 

Some ETFs Punching Above Their Weight 

After SPY, the Invesco QQQ Trust (QQQ) currently has the deepest and most liquid options market based on open interest. The fund boasts total open interest of 10.4 million contracts, ahead of No. 3 on the list, the iShares Russell 2000 ETF (IWM), with open interest of 7.3 million contracts. 

The iShares MSCI Emerging Markets ETF (EEM), the SPDR Gold Trust (GLD) and the Financial Select Sector SPDR Fund (XLF) are a few other behemoths with active options markets. 

Then there are also a number of ETFs on the list punching well above their weight. Those include the iShares China Large-Cap ETF (FXI), the iShares MSCI Canada ETF (EWC) and the ARK Innovation ETF (ARKK)

These ETFs have some of the most liquid options markets, even though they don't have a tremendous amount of assets. FXI, for example, only has AUM of $5.5 billion, while EWC has $3.6 billion and ARKK has $9.9 billion. That suggests these funds are popular with short-term traders. 

 

Top 20 ETFs With The Most Liquid Options 

FundTickerAUM ($million)Open Interest
SPDR S&P 500 ETF TrustSPY 357,97518,350,856
Invesco QQQ Trust Series 1QQQ 167,39010,401,326
iShares Russell 2000 ETFIWM 52,5527,275,251
iShares iBoxx High Yield Corporate Bond ETFHYG 14,2056,520,730
iShares MSCI Emerging Markets ETFEEM 25,7175,538,970
iShares Silver TrustSLV 9,4124,185,869
Financial Select Sector SPDR FundXLF 29,2183,857,262
iShares China Large-Cap ETFFXI 5,5383,060,268
Energy Select Sector SPDR FundXLE33,7623,045,571
SPDR Gold SharesGLD 55,2662,770,030
VanEck Gold Miners ETF/USAGDX 10,0802,503,643
iShares MSCI EAFE ETFEFA 45,6752,370,008
iShares MSCI Brazil ETFEWZ 4,6152,365,287
iShares 20+ Year Treasury Bond ETFTLT 22,7421,802,158
iShares MSCI Canada ETFEWC 3,6331,592,262
KraneShares CSI China Internet ETFKWEB 7,7531,532,280
ARK Innovation ETFARKK 9,9351,345,563
ProShares UltraPro QQQTQQQ 13,2291,255,883
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD 32,9501,249,216
Invesco Senior Loan ETFBKLN 4,0811,127,977

Source: Bloomberg 

 

Follow Sumit Roy on Twitter @sumitroy2   

Sumit Roy is the senior ETF analyst for etf.com, where he's worked for 12 years. Before joining the company, Roy was the managing editor and commodities analyst for Hard Assets Investor. He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing pickleball and snowboarding.