Cboe to offer new way for investors to diversify from tech stocks

by Bernard Goyder

Investors looking for another way to shake up and broaden out their technology-saturated portfolios are in luck. 

In April, the Cboe Global Markets Inc. is set to list options on the equal-weighted version of the S&P 500 as traders look to cut their exposure to the handful of technology giants that dominate the flagship US stock index. 

It comes just as investors are dumping their investments in the big tech winners of the past two years. Altogether Apple Inc., Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. still make up nearly a third of the market capitalization of the S&P 500 benchmark. The rout in tech, a petering out of the post-election euphoria and tariff anxiety have driven the S&P 500 down more than 6% from its February peak.

As fears mount about the sustainability of the valuations of the largest US-listed tech companies, clients have been clamoring for the Chicago-based options titan to offer a way to bet on the version of the US stocks benchmark that strips out market capitalization-bias, according to Rob Hocking, global head of product innovation at Cboe.

“You just see that concentration risk in those names,” said Hocking. “This just seemed to make sense.” 

There are other signs of investor interest in the equal-weight benchmark. An Invesco ETF, which tracks the index, has notched around $20 billion in inflows over the last year, taking the fund’s assets under management to just over $74 billion. 

Cboe’s cross-town rival, CME Group Inc., began offering S&P Equal Weight futures on Feb. 26 last year, Hocking noted. Open interest in the futures product is healthy at over 16,000 contracts as of March 5, from a standing start a year ago. 

In the Cboe’s view, the “underpinning futures market” now has enough volume and open interest to sustain an options product, Hocking said. Market makers and other market participants often hedge options positions using futures. 

The S&P 500 EWI options will settle into cash. Cboe’s current plan is to value the options at a tenth of the value of the equal-weight index, giving each options contract a notional value of around $70,000. In contrast, a single S&P 500 Index option contract has a notional value of over $570,000.

“It’s still rather large,” says Hocking, “but it’s a nice medium between what we think is a retail community and and an institutional community.” 

Since the pandemic, demand for derivatives products has soared in some pockets of the market, such as contracts with zero days to expiry. The number of options contracts that change hands each day has more than doubled since 2019 from 20 million contracts a day to 58 million contracts a day, representing around $3 trillion of notional value, according to data from Cboe. 

Cboe, which runs four options exchanges in the US, competes with the likes of Nasdaq Inc., Intercontinental Exchange Inc. and Miami International Holdings.

While proposed product launch remains subject to regulatory review, the exchange plans to debut the options on April 14 and to list the contracts on its largest exchange by volume, the Cboe Options Exchange.

Listing the equal-weight index options is a “great idea,” according to Daniel Kirsch, head of options at stock brokers Piper Sandler. “It is always nice to have extra tools in the toolkit.” 

Copyright Bloomberg News