Funds that specialize in selling options for profit, known as derivative income ETFs, have played a significant role in dampening the recent market volatility in U.S. stocks. The assets managed by these funds have more than doubled, jumping from $33 billion at the end of 2022 to roughly $71 billion, based on Morningstar’s data. This growth reflects a broader strategy among some investors to use a combination of stocks and stock derivatives for income, contributing to a general market calm. The effect of these strategies has been notable, with the Cboe Volatility Index, also known as Wall Street’s fear gauge, hitting a two-month low in late March due to strong earnings and the anticipation of rate cuts.
The market’s volatility has been somewhat checked despite the VIX’s recent climb to a near seven-week peak of 16.92, amid concerns over fewer than expected rate cuts by the Federal Reserve without an inflation increase. The presence of these option-selling funds, alongside strategies by institutions like Nomura, has been identified as a key factor in smoothing out market fluctuations. Moreover, the S&P 500’s resilience, standing close to record highs even amidst notable daily swings last week, underscores the impact of these strategies. However, the anticipation of U.S. consumer price data for March might test the market’s stability, especially if inflation rates come in higher than expected, challenging the prevailing low-volatility environment and the ongoing bull market that has propelled the S&P 500 to a significant rise from its October 2023 lows.
