Supporting the Rise of Derivatives-Based ETFs

In 2024, the global ETF market generated $1.6 trillion in inflows, expanding the market to $15.1 trillion in assets. Compelled by sophisticated and strategic ETF products, professional investors’ ownership of ETFs has increased by 24% since 2016.

Many of these investors are turning to leveraged, inverse and options-based ETFs to meet the demand for amplified returns, downside/volatility protection and income generation in a market that calls for thoughtful diversification more than ever.

The explosion in this class of ETFs comes as no surprise. Leveraged and inverse ETFs give traders and fund managers tools to enhance returns, position themselves for short-term moves and hedge. Options-based ETFs can help reduce portfolio volatility and increase income generation.

Hard numbers support the surging popularity of derivatives-based ETFs:

• In just one day in 2024, the GraniteShares 2X NVIDIA ETF (NVDL) attracted over a billion dollars in inflows. An etf.com ETF of the year nominee, NVDL netted $3.5 billion last year and generated nearly five-fold returns.
• During the first week of April, the ProShares UltraPro QQQ (TQQQ) added $3 billion, and the Direxion Daily Semiconductor Bull 3X ETF (SOXL) saw $2.2 billion in inflows.
• Leveraged ETF assets increased by $40 billion in 2024, the biggest jump since they hit the market in 2006.
• U.S.-domiciled derivative-income funds received over $28 billion in net new money last year. Derivative-income ETFs that use covered call or buy-write strategies neared $100 billion in AUM in 2024, buoyed by 39 new U.S.-domiciled launches.

Growth Breeds Complexity and the Need for Smarter Infrastructure

This surge in popularity is not an episodic event. Derivatives-based ETF momentum continues to advance in a straight, steep line. This growth—and the attendant operational and regulatory pressures—necessitates deeply informed and flexible partners, plus sophisticated technological environments explicitly built for this moment.

Tom Bonville, Clear Street’s Managing Director and Head of Derivative Sales states, “As derivatives-based ETF strategies gain traction, issuers face more regulatory and operational complexity. Success in this space hinges on having the right partners and infrastructure to support agile, scalable growth.”

The needs of today’s ETF issuers highlight the importance of working with a partner with derivatives expertise, modern technology, and a comprehensive platform structured to connect and streamline workflows and minimize operational and regulatory risk.

The Right Partner for a Booming ETF Market

As a securities-based swap dealer and modern prime broker combining best-in-class technology with exceptional service, Clear Street is a leading provider to the ETF market. For issuers looking to capitalize on ETF growth, Clear Street offers infrastructure built for security finance, including ETF issuers with solutions specific to derivatives-based products:

• Scalable cloud-native tech designed to modernize antiquated tech stacks and eliminate legacy inefficiencies
• Swap-dealing capabilities for leveraged and inverse exposure
• Advanced options trading infrastructure for options-based ETF strategies

Issuers launching a new fund or experiencing growth with existing products can benefit from Clear Street’s robust risk analytics, clearing, position/margin, financing, market data, proprietary settlement platforms and end-to-end operational support. Built for speed and agility, Clear Street’s modern platform allows for the fast and rapid rollout of products that empower clients and help them solve real-world challenges.

Despite the massive growth, derivatives-based ETFs remain in the early innings. Amid persistent global economic and market uncertainty, the need for these tailored, high-end solutions that help drive and diversify portfolios will only increase. Thriving in this environment while remaining compliant requires sufficient tools and high-performance infrastructure built to scale.

Clear Street’s world-class platform and derivatives expertise make it the ideal partner to help ETF issuers innovate, scale smarter and stay on top of an ever-evolving regulatory landscape.

This article originally appeared on etf.com.