ETF Trading Guide: How Industry Funds Beat SPY in Options Returns

Ties between assets weaken in a stable market but strengthen in a turbulent market.

• Exchange-traded funds, or ETFs, provide exposure to entire industries while reducing the risk associated with individual stocks.
• This makes them an excellent diversification tool.
• Sector ETFs often have higher price swings than SPY, offering a tempting opportunity for option writers with higher price swings.

Exchange-traded funds (ETFs), such as the SPDR S&P 500 ETF Trust (SPY), can help reduce the risk associated with investing in individual stocks by holding a portfolio of assets.

ETF trading allows you to further diversify your investment portfolio.

Over the past year, all sectors have been in the black. The Financial Select Sector SPDR Fund (XLF), which represents banks, and the Technology Select Sector SPDR Fund (XLK), for technology companies, particularly excelled, delivering returns of more than 20%, beating the SPY in most cases.

However, from a longer-term perspective, the Energy Select Sector SPDR Fund (XLE) has historically underperformed, while XLK, the Healthcare Select Sector SPDR Fund (XLV), and the Industrials Select Sector SPDR Fund (XLI) have been overall strong performers. results. SPY has outperformed most ETFs since the pandemic and from late 2023 to the present.

Over the past 10 years, these ETFs have often exhibited larger price swings than SPY, offering more trading opportunities for options sellers.

For example, XLE, with the highest average price swing, performed the worst and remained relatively stable over the years. This makes it ideal for strategies that benefit from stability, such as choke or iron condors.

Let’s look at their relationship with the S&P 500 under different market conditions. We distinguish periods as follows:

• Bull market: Over the past 10 years, except 2020–2022.
• Bear market: 2020-2022

In a stable, growing market, ties between assets tend to weaken.

Conversely, when the market is turbulent, these connections are strengthened, meaning assets often move in the same direction.

The energy sector through XLE and utilities through the Utility SPDR Fund (XLU) have shown much lower correlations with other assets in both stable and volatile markets. This means that XLE and XLU can provide better diversification for a portfolio focused on the major indices.

Kai Zeng, Research Group Director and Head of Tasty Life Chinese Content, has 20 years of experience in markets and derivatives trading. He co-hosts several live shows, including From theory to practice and building blocks. @kai_zeng1

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