What’s Behind the Huge Flows Into Derivative-Based ETFs?
Derivative-based ETFs are pushing half a trillion in AUM right now, as investors have flocked to the growing category. Amid that rising interest in recent years, however, other investors may have questions. What is included in the derivative ETF landscape? A recent VettaFi webinar focusing on derivative ETFs included insight from T. Rowe Price leaders on the kind of ETFs available in that space.
Key Takeaways:
- Active ETFs have helped asset managers innovate in the growing derivative ETFs space.
- Derivative-based ETFs have added some $50 billion in net flows in the first half.
- T. Rowe Price offers two derivative-based strategies, TPUT and TCAL.
Hosted by VettaFi Senior Industry Analyst Kirsten Chang, the session explored two of the firm’s ETFs, the T. Rowe Price Capital Appreciation Market Opportunities ETF (TPUT) and the T. Rowe Price Capital Appreciation Premium Income ETF (TCAL).
Chang was joined by both T. Rowe Price Investment Management Head of Quantitative Equity Farris Shuggi, CFA and T. Rowe Price Senior ETF Specialist, Brian McMullen, to discuss. The duo spoke to the category’s growing popularity, up around $50 billion in net inflows in the first half of 2026.
Per Shuggi, derivative ETFs, which often focus on income, have grown in popularity amid the rise in active ETFs. He described them as part of a growing segment of “solutions-oriented strategies.” The ETF vehicle structure has helped provide the flexibility to advance those strategies, too.
“If you think about derivative-based ETFs with the asymmetric payoff and the ability to generate extra income by selling puts, selling calls and garnering that variance risk premium, they can really help solve additional problems for investors,” Shuggi said.
TPUT and TCAL: Advancing the Derivative ETFs Space
Per McMullen, the interest in derivative-based ETFs really spiked since the pandemic. As investors were looking for income, interest rates dropped down to zero, he noted, leading investors to look at these types of ETFs. What’s more, even as rates rose, the yield still wasn’t there, leading investors to try new options.
“Fast-forward to 2022, everyone really was relying on fixed income to do its job,” McMullen said. “And for a lot of advisors…it didn’t hold up as what they would’ve expected in a rising rate environment.”
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Chang suggested that some investors might see these strategies as introducing a lot of risk. Shuggi explained that each is crafted for their own particular approach and the way they’re designed impacts their specific level of risk based on how they use leverage or derivatives.
So, what roles do TPUT and TCAL take in that derivative ETFs landscape? TCAL charges 34 basis point (bps) while TPUT charges 25. The duo explained that the funds operate almost as sister strategies, but with very different objectives.
“They solve very different needs in a client’s portfolio,” Shuggi said. “So let’s start with TCAL…TCAL is a covered call strategy where we own 80 to 90 low risk, high quality names and then write individual calls against each one of those holdings.”
TCAL vs. TPUT: Options to Hold
TCAL aims to meet three main goals, he said, including high single digit yields over time, strong downside protection, and preserving capital over time. It has produced an 11.6% 12-month trailing distribution rate as of June 30, according to T. Rowe Price data.
“If you look at TCAL since we’ve incepted, I believe there’s been about 33 days when the S&P 500 had a negative return of minus one or greater,” he explained. “And on those days, TCAL had only 35% of the downside capture of the market. So it’s an incredibly defensive strategy.”
Meanwhile, Shuggi positioned TPUT as a “cash deployment” dynamic allocation strategy. That fund also has three goals. TPUT looks to offer income “above and beyond the risk-free rate.” It also looks to invest in the market when it dips.
“The second thing we want to do in TPUT is opportunistically invest in the market when we believe we’re at a statistical advantage to do so,” he said.
Finally, for its third goal, it aims to help control for “behavior bias,” he said. The strategy looks to automatically help address the moments when investors panic and either reduce equities exposure or, sometimes, fail to buy into the recovery.
Together, those derivative ETFs may help investors reach their goals with active adaptability. For those wanting to add income and the latest in ETF innovation, TPUT and TCAL may appeal.
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