Nasdaq Eyes Monday Options for ETFs Amid 0DTE Demand Surge

Key Takeaway

• Nasdaq to seek approval for Monday expiries on options for ETFs including USO, GLD, SLV, TLT, and UNG, expanding short-term trading options.
• This move responds to surging demand for equity derivatives with short durations amid record interest in 0DTE options.
• Addition aims to enhance the continuity of heavily traded ETF products, reflecting broader market trends towards frequent trading opportunities.

Expanding Options in the Market

Nasdaq Inc. announced plans to seek regulatory approval for Monday expiries on contracts tied to a suite of commodities and Treasuries exchange-traded funds (ETFs), including the United States Oil Fund (USO), SPDR Gold Shares (GLD), iShares Silver Trust (SLV), iShares 20+ Year Treasury Bond ETF (TLT), and United States Natural Gas Fund (UNG). This move aims to complement the traditional Friday and the recently introduced Wednesday expiries, responding to the booming interest in short-duration options. Sean Feeney, head of US options at Nasdaq, highlighted the initiative's goal to increase the continuity of product availability in these heavily traded ETFs.

Derivatives-Powered ETFs Under the Microscope

Bank of America Corp. (BofA) has joined a chorus of skeptics warning against the burgeoning trade in exchange-traded funds (ETFs) that leverage options to enhance yields. Despite the quadrupling of assets in these derivatives-powered ETFs to $69 billion, BofA's analysis suggests that traditional dividend-focused ETFs might offer better returns for most investors. Jared Woodard, a strategist at BofA, pointed out that the complex strategies employed by these ETFs often fare worse than simpler alternatives, challenging the perceived value of such investment vehicles.

The Income Versus Performance Trade-Off

Covered call ETFs, such as the JPMorgan Equity Premium Income ETF (JEPI) and the Global X Nasdaq 100 Covered Call ETF (QYLD), have shown mixed performance. While they outperformed major equity indexes during the 2022 bear market, they have lagged in the subsequent stock rally. This discrepancy underscores the limitations of covered call strategies in bullish market conditions. However, proponents argue that these ETFs serve a specific purpose by providing a steady income stream, accepting lower total returns as a trade-off for perceived lower risk.

Tax Implications and Investment Alternatives

BofA's analysis also sheds light on the tax efficiency of complex options products versus high-dividend ETFs. The bank suggests that high-dividend funds might offer similar or better yields on a tax-adjusted basis compared to option income ETFs, which often have less favorable tax treatment for their distributions. This finding indicates that investors might achieve better after-tax returns with simpler, dividend-focused investment strategies. BofA recommends simpler exposures to dividend stocks for superior returns, especially as the call overwriting strategy has proven unprofitable in recent years.

Street Views

• Sean Feeney, Nasdaq (Neutral on short-duration options market):

  "It increases the continuity of product that’s available in those ETF products that are heavily traded."