Options on ETFs - Now for China, Gold Miners, Alt. Energy

Includes: FPX, FXI, GDX, PBW, PHO
by: Richard Kang

Given the market action, I’d like to continue on my focus on defensive measures (inverse ETFs, VIX, cash balances, etc.). Today, I received a notice from Business Wire regarding new options on some very interesting ETFs:

The Chicago Board Options Exchange today announced it will list options on the following five ETFs beginning today: First Trust IPOX-100 Index Fund (AMEX and CBOE ticker symbol FPX); iShares FTSE/Xinhua China Index Fund (NYSE and CBOE ticker symbol FXI); Market Vectors Gold Miners (AMEX and CBOE ticker symbol GDX); Powershares Wilderhill Clean Energy (AMEX and CBOE ticker symbol PBW); and Powershares Water Resources Portfolio (AMEX and CBOE ticker symbol PHO).

The Designated Primary Market Makers [DPM] for the options are as follows:

First Trust IPOX-100 Index Fund (NYSEARCA:FPX)
DPM: Jane Street Specialists

iShares FTSE/Xinhua China Index Fund (NYSEARCA:FXI)
DPM: Jane Street Specialists

Market Vectors Gold Miners (NYSEARCA:GDX)
DPM: Jane Street Specialists

Powershares Wilderhill Clean Energy (NYSEARCA:PBW)
DPM: Susquehanna Investment Group

Powershares Water Resources Portfolio (NASDAQ:PHO)
DPM: Susquehanna Investment Group

For more information on new listings, visit the Trading Tools section of the CBOE website at: http://www.cboe.com/NewListings.

Frankly, I’m not a big fan on the first two of these ETFs. FPX is unique in concept but as an risk/asset allocator, it’s hard to see how this fits in the overall portfolio construction process.

For me, there are just so many better choices to play China than FXI. Although a big believer in ETFs, China has to be one area where an active manager has a more than decent shot of beating a comparable benchmark index. Also, the costs of FXI don’t justify what’s in the fund. I think that instead of an index ETF, China should be managed with a long-short equity strategy. Whether that’s actually possible (restrictions from Chinese securities regulators) is an obvious limitation but certainly there’s optimal solution somewhere in between.

Although late in arriving by just over two months, put options on GDX, PBW and PHO are certainly a good arrival for investors in these underlying positions.

Investors who use some sort of risk budgeting system to help in determining asset allocation constraints will be happy to see more options for ETFs that have historically shown large price volatility. The recent discussions on this site on the pros/cons of inverse funds, shorting and put options should allow more investors to essentially manage their portfolios in a very “hedge fund”-like manner.

About this article:

Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here