Exchange Traded Funds (ETFs) offer an easy way to invest in a variety of securities. They can provide a diversified portfolio with improved efficiency and cost savings. Also like stocks, ETFs offer potential capital gains – but at the cost of increased risk. When deciding which ETFs to invest in, it’s vital to consider the associated costs and potential returns.
Here is our top 10 for trading options! This list offers funds from energy, finance and tech sectors, giving investors plenty of choice. We’ve selected these ETFs based on their liquidity and low costs. The list includes leveraged ETFs, to enable investors to gain greater returns using investment strategies like covered calls or selling cash-secured puts.
The list features five domestic U.S. level ETFs and five international global ones; allowing investors to diversify and find particular opportunities in areas they believe could benefit from option trades. Now, let’s take a look at our top 10 ETFs for trading options, listed alphabetically:
ETFs for Trading Options
Trading options? Fabulous! It can make you money and control your risk. But, choose wisely! Not all ETFs are created equal. Here’s the top 10 ETFs to aid your trading options. Let’s check out the advantages and drawbacks of each one:
- ETF 1
- ETF 2
- ETF 3
- ETF 4
- ETF 5
- ETF 6
- ETF 7
- ETF 8
- ETF 9
- ETF 10
SPDR S&P 500 ETF (SPY)
The SPDR S&P 500 ETF (SPY) is a well-known Exchange Traded Fund (ETF). It has been around for over two decades, and its record of providing returns that match the S&P 500 index speaks for itself.
SPY is made up of eleven different sub-indexes. This diversification lets traders access multiple markets at once, while avoiding sector volatility. SPY has a market cap of over $300 billion, making it an ideal option for those who want to trade options. Tight spreads, low margin requirements and liquidity make it a great choice.
SPY gives traders access to both big, established companies and smaller firms with more growth potential. Options contracts can be easily acquired with the benefits of liquidity and cost efficiency not seen in other ETFs or individual stocks.
iShares Russell 2000 ETF (IWM)
iShares Russell 2000 ETF (IWM) is an exchange-traded fund traded on the NYSE Arca Exchange. It follows 2000 stocks with a median market capitalization of $3 billion. The fund strives to give low-cost access to a wide portfolio of small- and mid-cap companies. It holds approximately 1,500 equities on average.
The fund has a low expense ratio and high liquidity, making it a great choice for trading options. Its large underlying universe also makes it lucrative for those who are interested in sector investing or cashing in on trends among smaller firms—including those with limited research coverage from Wall Street analysts and institutions. Its high concentration in the financials sector (29%) makes it one of the largest financial ETFs on the market, providing well-diversified portfolio exposure to companies in businesses such as banking, insurance, real estate trusts and leasing companies.
iShares Russell 2000 ETF is beneficial for generating yield since more than 60% of its holdings pay dividends. Investors get exposure to dividend-generating stocks usually not attainable through other passive strategies—while avoiding individual stock selection risk associated with trading outside their own experience set or within industries they’re unfamiliar with. For those looking to hedge their investments against currency risk related to US dollar fluctuations versus global currencies such as Euro or Japanese yen (JPY), IWM also provides overlooked but valuable opportunities thanks to its heavy currency hedge inherent when purchasing an ETF that tracks US-based small cap stocks relative to other vehicles or local strategies employed outside America.
Invesco QQQ Trust (QQQ)
QQQ is an Exchange Traded Fund (ETF). It tracks the NASDAQ 100 Index. It was created in 1999 and is one of the world’s most traded ETFs, with over 330 million shares traded daily in 2019.
QQQ is a fractional undivided beneficial interest in the aggregate net assets of the fund. It is a non-diversified fund and holds most of the securities in its index.
The holdings are heavily weighted towards technology stocks. Invesco reviews and adjusts the stock components annually. It is chosen for trading options due to its reliance on high liquidity stocks from various sectors.
The Nasdaq 100 Index offers diversification benefits. Its weighting for each stock is calculated by their respective market capitalizations and not just their value at any given time. This offers investors a more stable approach when trading options with an ETF such as QQQ.
iShares MSCI Emerging Markets ETF (EEM)
The iShares MSCI Emerging Markets ETF (EEM) is an index-based exchange-traded fund. It seeks to measure the performance of big, liquid and cost-efficient companies in the emerging markets. Its portfolio consists of over 900 stocks from more than 20 countries. This includes Brazil, China, India and South Africa.
The fund tracks the MSCI Emerging Markets Index. This tracks the daily price movements of large companies in the emerging markets.
Traders looking for various options strategies prefer this fund. This is because it has a lower management expense, intra-day liquidity and diversified exposure across several emerging market countries. Option traders love trading EEM. This is because it offers a wide range of national exchanges with options contracts on individual stocks and American Depository Receipts (ADRs). This allows traders to take part in a broad array of market trades at lower costs compared to directly ownership holdings.
EEM also provides access to broad market coverage with exposure to emerging markets. These markets might not be accessible through actively managed funds or direct investments. Option traders use EEM as part of portfolios that hold international assets. This is to hedge protection against home currency movements against international currencies such as the Euro or Mexican Peso.
Financial Select Sector SPDR Fund (XLF)
The Financial Select Sector SPDR Fund (XLF) is a big, liquid ETF. It tracks the performance of the financial services sector. It gives investors access to big banks, insurers and finance companies. This ETF has been trading for over 15 years. It gives an average annual return of 7.58%, higher than the S&P 500 index.
XLF is resilient during market downturns. It’s a great option for traders looking for returns from options trading strategies. Its options are liquid and have low bid-ask spreads, keeping trading costs low. It’s also less volatile than other ETFs, making it ideal for income-oriented investors and traders.
iShares Core S&P Small-Cap ETF (IJR)
IJR, the iShares Core S&P Small-Cap ETF, is essential for options traders. It tracks the S&P SmallCap 600 index, which is part of the Russell 3000 Index. IJR is great for diversification and has low risk + volatility.
It’s ideal for short-term options trades because it’s liquid, with smooth price action and tight bid/ask spreads. Low fees also add value. The 0.07% expense ratio is one of the lowest among small cap funds.
Long positions in IJR can benefit from its low correlation with other asset classes. This provides insulation against economic shifts. Plus, during strong economies, IJR tends to outperform due to rising commodities and consumer spending.
Vanguard FTSE Emerging Markets ETF (VWO)
VWO is a renowned ETF on the market. It has over $76 billion in assets under management. It follows the FTSE Emerging Index and invests mainly in stocks of companies located in emerging markets. The fund was created in 2004 and it strives to give long term growth by investing a portion of its assets into emerging markets economies.
VWO provides investors a diversified portfolio with exposure to 800 stocks from 24 countries. China, India, Taiwan, South Korea and Brazil are the major countries represented. It is weighted by market capitalization and its top holdings include:
- Tencent Holdings Ltd.
- Samsung Electronics Co., Ltd.
- China Construction Bank Corp.
- Naspers Limited
- Taiwan Semiconductor Manufacturing Company Ltd.
- Alibaba Group Holding Ltd.
- Hon Hai Precision Industry Co. Ltd.
- AIA Group Ltd
- Ping An Insurance (Group) Company of China Ltd.
VWO has low expenses and commissions, making it an attractive choice for investors trading options with this ETF. Trading VWO is effortless because it trades on all the major exchanges like NYSE Arca, Nasdaq Global Select Market and BATS Global Markets Inc.. Its liquidity allows investors to enter or close out a position quickly without worrying about slippage or costs related to other ETFs investing in less liquid markets. VWO is an ideal ETF for trading options given its diversification across countries in emerging markets and its low cost structure when trading options relative to large cap ETFs like S&P 500 or Dow Jones Industrial Average index funds.
SPDR Dow Jones Industrial Average ETF (DIA)
DIA, also known as Diamonds, is an exchange-traded fund. It follows the price and yield performance of the Dow Jones Industrial Average. This ETF gives traders a liquid and cost-effective way to gain exposure to big U.S. companies with low risk.
The ETF lets traders buy 30 blue-chip stocks in one transaction for lower costs. It has an expense ratio of 0.17%, which is low for its category. DIA has been around since 1998 and has $29 billion in assets under management.
The ETF covers large U.S.-listed companies such as 3M, Coca Cola, Exxon Mobil, General Electric, McDonald’s and Microsoft. This allows beginners or those just starting to trade options to diversify with one trade.
DIA’s liquidity makes it popular for short term trading. Investors can quickly enter or exit positions and take advantage of strong intraday liquidity. The ETF also offers more flexibility than individual stock options when trading options such as puts and calls. This helps traders with capital gains or protection against losses due to market or economic changes.
iShares Core High Dividend ETF (HDV)
iShares Core High Dividend ETF (HDV) is an exchange-traded fund. It lets investors gain access to some of the highest dividend-paying stocks in the market. It trades on NYSE Arca and holds around 100 large-cap stocks from all industries. These stocks are expected to pay steady and rising dividends, providing equity income and potential capital growth.
This ETF has options for different trading strategies. These include high delta strategies and strategies based on option volatility. HDV also provides leverage through buying calls and puts. Investors can also use long straddles or strangles, making profits when options prices move in either direction.
Finally, traders can use HDV as a way to hedge their portfolios against market conditions. This includes calendar spreads and diagonal call spreads. These combine long and short positions to make profits depending on how the market moves.
iShares Core U.S. REIT ETF (USRT)
USRT gives investors the chance to get exposure to the U.S. Real Estate Investment Trust (REIT) sector. It invests in REITs of all sizes. Its underlying index, the FTSE EPRA/NAREIT North America Index, holds 109 REITs that focus on property management and income-producing real estate.
This ETF is ideal for those who want domestic real estate exposure, with low company concentration risk. It also has lower trading costs and greater tax efficiency than active mutual funds. USRT can be used for trading options or as part of a larger options trading strategy.
Trading options enables investors to capitalize on market activity and make leveraged investments. ETFs are an excellent vehicle for traders, as they provide access to numerous markets with a single security.
Investors must consider the risks associated with trading options and the ETFs used as a vehicle prior to investing. Furthermore, thorough research is essential to guarantee that you are selecting the suitable asset allocation and staying properly diversified. By recognizing what returns and risks you are taking on with each option trade you execute, you could seize opportunities and boost your portfolio’s performance eventually.
Finally, bear in mind that there is no one-size-fits-all approach when seeking ETFs for trading options – each investor should have their own criteria in relation to what securities they would like to invest in based on their individual risk tolerance, experience level and other variables.
Frequently Asked Questions
Frequently Asked Questions
Q1: What are the top 10 ETFs for trading options?
A1: The top 10 ETFs for trading options are the SPDR S&P 500 ETF (SPY), the iShares Russell 2000 ETF (IWM), the PowerShares QQQ ETF (QQQ), the iShares MSCI Emerging Markets ETF (EEM), the iShares Core S&P 500 ETF (IVV), the Vanguard Total Stock Market ETF (VTI), the iShares Core MSCI EAFE ETF (IEFA), the Vanguard FTSE Developed Markets ETF (VEA), the Vanguard FTSE Emerging Markets ETF (VWO), and the SPDR Dow Jones Industrial Average ETF (DIA).
Q2: What risks are associated with trading ETF options?
A2: Trading ETF options can be risky, as the options involve leverage and may involve large losses if the market moves against the investor’s position. Additionally, ETF options may be subject to greater volatility than traditional stock options and are subject to the risk of sudden and large losses. It is important to understand the risks associated with trading ETF options before investing.
Q3: What strategies are available for trading ETF options?
A3: There are a variety of strategies available for trading ETF options, including covered calls, vertical spreads, straddles, strangles, and collars. It is important to understand the risks and potential rewards associated with each strategy before investing.