Top 10 ETFs for Trading Options

When it comes to trading options, stocks aren’t the only alternative. You can also buy and sell options for many exchange-traded funds (ETFs), which are diversified investment vehicles that combine multiple assets such as stocks, commodities, and bonds-essentially, a mutual fund that is traded like a single stock.

As with stock options, there are a few basic rules when it comes to trading ETF options. For one, it’s much better to trade options that are highly liquid, i.e. those that have a high daily trading volume.

Options with high liquidity are easier to trade in and out of, which is a critical concern if you need to quickly change your holdings. In addition, highly liquid options generally have a lower bid-ask spread, which means that you’ll be at less of a disadvantage when you enter into the option at a broker like tastyworks.

In this article, we’ll look at the 10 most active ETFs right now: why they’re seeing so much activity, and whether they seem like a good investment in one direction or the other.

1. S&P 500 SPDR (SPY)

It’s no surprise that the SPDR S&P 500 ETF [SPY] has the most liquid options of any ETF on the market. This ETF is so popular that the bid-ask spread is often as narrow as a penny wide.

The S&P 500 has been on a tear lately, up 12% since the beginning of the year. Q1 2019 is set to be the best quarter since 2009.

2. Nasdaq QQQ Invesco ETF (QQQ)

Nasdaq is the second-biggest stock exchange in the world by market capitalization (right behind the NYSE), it’s no surprise that we see the Nasdaq ETF [QQQ] on this list.

Like the S&P 500, Nasdaq quarterly returns have been very strong in the new year, recovering from their plunge in Q4 2018. Still, investors should account for the whispers about a potential recession coming later in the year or next year.

3. Emerging Markets iShares MSCI ETF (EEM)

Emerging Markets iShares MSCI ETF [EEM] is an ETF that combines large and mid-sized companies from “emerging markets,” i.e. those that are not yet considered highly developed.

The term encompasses many countries in South America, North Africa, Eastern Europe, and Asia. Countries with the most exposure in EEM include Hong Kong, South Korea, Taiwan, Mexico, and the BRICS economies.

4. Brazil iShares MSCI ETF (EWZ)

Brazil iShares MSCI ETF [EWZ] is an investment vehicle for traders who are interested specifically in Brazil; it targets large and mid-sized Brazilian companies.

Brazilian economic growth was disappointing in 2018, due to a slowdown in demand and a truck drivers’ strike that disrupted the country’s manufacturing industry and logistics.

However, new president Jair Bolsonaro has pledged to open up the country’s economy to make it friendlier to business interests.

5. Russell 2000 iShares ETF (IWM)

Russell 2000 iShares ETF [IWM] tracks the Russell 2000 index, and it’s the biggest ETF if you’re interested in U.S. small-cap stocks.

This ETF can be useful to investors in multiple ways: a high-risk, high-reward investment for those who can tolerate short-term uncertainty, as well as a smaller part of a diverse portfolio with a buy-and-hold strategy.

6. Ipath.B S&P 500 VIX Short-Term Futures ETN (VXXB)

The next entry on this list isn’t actually an ETF at all, but rather an exchange-traded note (ETN).

This means that investors face credit risk in terms of the institution that backs the ETN, rather than the tracking risk that investors face with an ETF.

iPath.B S&P 500 VIX Short-term Futures ETN [VXXB] is intended specifically as a replacement to VXX, which provided access to the VIX volatility index of the S&P 500.

7. High Yield Corp Bond Ishares Iboxx $ ETF (HYG)

HYG is one of the most popular ETFs for high yield corporate bonds with denominations in U.S. dollars, along with its competitor, S&P Barclays High Yield Bond [JNK].

The lower credit quality of the bonds means that investors face higher market risk, but also the prospect of higher returns.

8. S&P 500 Financials Sector SPDR (XLF)

The S&P 500 Financials Sector SPDR [XLF] tracks financial stocks in the S&P 500 index, weighted by their market capitalization.

This includes exposure to a variety of subindustries within finance: banking, insurance, financial services, consumer finance, real estate investment trusts (REITs), and more. J.P. Morgan [JPM] and Wells Fargo [WFC] are just two of the names attached to this ETF.

9. EAFE Ishares MSCI ETF (EFA)

This EAFE iShares MSCI ETF [EFA] tracks the EAFE index, which reflects the performance of large-cap and mid-sized stocks across developed countries in Europe, Australasia, and the Far East.

This geographic diversity makes EFA a common sight in many long-term investors’ portfolios, especially those seeking to branch out from their U.S.-centric holdings.

10. China Large-Cap Ishares ETF (FXI)

Last but not least, we have the iShares China Large-cap ETF [FXI] tracks large-cap stocks in China.

Despite the country’s vast potential for growth, some investors have been wary of the Chinese market lately due to the reignited trade war with the U.S. and a few widening cracks in the Chinese economy.

China’s stock market posted the world’s worst returns in 2018, with a dismal 28 percent loss to finish the year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.