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ETF Options Commentary

Release date: 27 Mar 2020 | Eurex Exchange, Eurex Clearing, Eurex Group

ETF Options Commentary

The past couple of weeks saw substantial market volatility sweep across fixed income and equity markets alike, raising volumes across all securities markets as investors re-adjusted their asset allocations across asset classes. In these volatile times, many investors picked ETFs as their instrument of choice to manage their exposure across all asset classes. This was partially in response to the liquidity challenges seen across the entire cash bond market and was especially prevalent in corporate bonds.

Fixed income ETFs particularly took prominence during this period, with the largest ETFs in Europe seeing significantly raised volumes. The flagship iShares high yield and investment grade credit ETFs listed in Europe also experienced substantially higher volumes. The Euro high yield ETF has seen average daily volumes of  USD 314 million in the past month, three times higher than in the preceding three months. Meanwhile, the USD high yield traded USD 160 million in the past month, more than double the traded notional seen over the three months prior.

The Euro investment grade credit ETF traded over USD 530 million in average daily volumes over the past month, double the previous three months and the USD equivalent saw traded notional increase nearly four-fold to USD 192 million in average daily volumes.

Investors have favored high yield in the low rates environment in the hunt for yield while also taking advantage of its correlation with equities. High yield does offer greater downside protection than equities, experiencing smaller falls than both the S&P 500 and the EURO STOXX 50®.

Spreads in both U.S. and European high yield have blown out, reaching 1013bps and 889bps respectively at the end of last week, having been at 350bps and 305bps a month prior. This has driven yields up to almost 11% in the U.S. where rates are higher and up to 9.46% in Europe.

Volatility across fixed income rose significantly, implied volatility in both USD high yield and investment grade credit reached 40% in the March expiry with at-the-money implied being closer to 4% in the middle of January.
Emerging market debt has shown an increased correlation to the S&P 500 while also exhibiting increased volatility. The index correlation has increased to c.0.68, having averaged 0.25 from 2017 to 2019, and at-the-money implied volatility has approached levels of 90% in the March expiry.

The options market is pricing in high volatility in the short-term, with at-the-money implied volatility falling to c.30% in the June expiry for the USD investment grade credit, c.35% for the high yield, and falling to c.40% in the USD emerging market debt.

While fixed income ETFs have proven effective instruments for managing positions in the fixed income markets, investors also turned to Eurex options listed on fixed income ETFs to manage their beta while also taking tactical positions in credit. There has been raised activity specifically in the USD high yield ETF options as market participants have benefitted from the use of put options to hedge their exposure.

Eurex has fixed income ETF options listed on iShares US Dollar and Euro credit ETFs, covering both investment-grade credit and high yield. Furthermore, Eurex also recently listed options on the iShares USD Treasury Bond 20+yr UCITS ETF.


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