| The Great ETF Explosion |
Currently there are over 5,000 US-listed ETFs trading across the major US exchanges – more than twice as many as there are companies listed on the NYSE.
What started out as a way of capturing the large market movement has morphed into thousands of ‘baskets of stocks’ capturing different segments and combinations of stocks.
Why SPY?
With more than 5,000 ETFs to choose from, why does the ITM Plan still use SPY? It’s so expensive! Which means, of course, that even DITM options with very little time value are expensive too. So, I looked for cheaper alternatives.
The Shortlist
After searching, I found only four US-listed ETFs close enough to SPY to examine, together with Mini-SPX index options. There weren’t any other obvious contenders. I started making a table of the alternatives.
- VOO: Vanguard S&P 500 ETF
- IVV: iShares Core S&P 500 ETF
- RSP: Invesco S&P 500 Equal Weight ETF
- SPYM: SPDR Portfolio S&P 500 ETF
- Mini SPX: Cboe Mini-SPX Index options.
Now to test if we can use them.
First Test: Does it track the same thing?
Well, RSP (Invesco S&P 500 Equal Weight ETF ) fell at the first hurdle.
Yes, it has all the S&P 500 stocks but they are equal-weighted, not weighted by market cap like the index. This makes the effect of the very large stocks like Nvidia and Microsoft very much less – the same, in fact, as all other stocks (at each rebalance). Is this a good idea? Possibly. Interesting, but maybe for another blog.
BUT – it does not mirror the S&P 500, therefore our backtesting cannot simply be transferred to it. One down.
Second Test: Is it Cheaper?
The prices when I checked on 30 Aug 2026 were:
- SPY: $771.10
- VOO: $708.75
- IVV: $774.75
- SPYM: $90.57
- XSP: $771.18
The obvious stand out is SPYM (formerly SPLG) at less than 12% of the SPY price. And options will be cheaper – let’s check them out.
The options are definitely cheaper. If we take the 50% option ($45 strike) then we only need $4,780 to get into the trade. If we choose the 60% option ($55 strike) we only need $3,800.
You’ll notice that I am estimating the capital required from the ask price rather than the midpoint of the bid and ask. Why? Because we have a liquidity problem here. Check out the spread: 8.6%. If we bought at the ask and immediately sold at the bid, we would lose 7.9%. The bid would have to rise by more than 8% merely to reach the price we paid.
The time value is also higher. Although this is a deep-in-the-money option, paying $38 for the $55 call gives us an effective purchase price of $93 when SPYM is trading at $90.57. The difference – $2.43, or 2.7% of the SPYM price – is time value.
So, yes, it is cheaper, but the disadvantage is the extra time value you have to pay for.
What about the other contenders?
XSP initially sounds promising because it represents one-tenth of the S&P 500 Index and has listed options. However, its quoted level is approximately the same as SPY’s share price, so it provides no meaningful capital advantage.
VOO and IVV are also priced relatively close to SPY. VOO offers a modest reduction in capital, but both have considerably less options liquidity.
Here are the figures from the comparable contracts:
The percentage spread is calculated as the spread divided by the bid price.
Why are the spreads wider?
The quoted option premium is only part of the cost. The spread determines how much we may lose simply by entering and exiting the trade.
The difference is largely liquidity. SPY attracts enormous trading activity and intense competition between market makers, producing deep markets and narrow spreads. VOO, IVV and particularly SPYM attract much less options trading, so their spreads tend to be wider and midpoint fills less certain.
XSP is different again. It is a proprietary Cboe index option supported by market-maker quotes. A displayed quote does not necessarily indicate active trading at that particular strike and expiry.
ETFs proliferate but liquidity concentrates
Thousands of ETFs have divided the market into ever smaller and more specialised baskets. But options liquidity does not spread itself evenly across all those products. It tends to cluster in a relatively small number of heavily traded contracts.
What does it mean for ITM?
SPY is not used because it is the cheapest fund, or because no other fund follows the S&P 500. It is used because it combines:
- the correct underlying index;
- a long and reliable price history;
- suitable long-dated options;
- enormous options liquidity;
- narrow spreads;
- efficient entry, exit and rolling.
For investors, there are thousands of ETFs. For the ITM Plan, there is still no obvious replacement for SPY.
Possibly with QQQ there are better contenders, but that’s for another blog.
Why did I choose options with strikes close to 60% of the underlying price and January 2027? Simply because I wanted the closest possible comparison. I used the same expiry – 15 January 2027 – and selected the nearest suitable strike available for each product.
To the markets . .
Not a brilliant week – although up for the week. Nvidia’s earnings were, of course, the big news, with revenue and profit exceeding Wall Street expectations.
Salesforce was also up nearly 23%. When I read that, I thought, “Well, how wrong can you be!” You may remember that I had lumped it in with SaaS (Software as a Service) stocks and said that the future did not look rosy for them. I was preparing to eat humble pie when I saw this headline:
So perhaps my theory wasn’t entirely shot out of the water. Salesforce had reported strong results and raised its forecasts – but it had also seen the writing on the wall and expanded its partnership with Anthropic. Smart.
So, my theory wasn’t shot out of the water – instead they saw the writing on the wall and made a partnership. Smart.
SPY Charts
SPY is still consolidating. Support at 760 is continuing to hold, but no new highs this week.
The long term chart shows the trend line is holding.
SPYG Charts
SPYG is also in consolidation and has returned to its upper bound. Hopefully this week it breaks through.
Long term it is still near the top of the trading channel.
QQQ Charts
QQQ is also still consolidating – as it has been for the last 4 months. Boring? Yes – but remember last October it was consolidating for almost 6 months – check out the second chart.
Longer term we see it is still crawling along the upper bound of its trading channel.
VIX Chart (Volatility)
VIX has popped up slightly but doesn’t seem significant.
ITMeter
The week ahead . . .
Employment will dominate the week, culminating in Friday’s August jobs report. Broadcom heads a busy technology earnings calendar.
Monday 31 August
Announcements: No major announcements.
Earnings: Science Applications International.
Tuesday 1 September
Announcements: Final Manufacturing PMI, ISM Manufacturing Index, JOLTS job openings, construction spending.
Earnings: Nio, Dell Technologies, Palo Alto Networks, MongoDB, GitLab, Credo Technology.
Wednesday 2 September
Announcements: ADP Employment Report, factory orders, Federal Reserve Beige Book.
Earnings: Broadcom, Snowflake, Hewlett Packard Enterprise, NetApp, C3.ai.
Thursday 3 September
Announcements: Weekly jobless claims, revised productivity and labour costs, trade balance, final Services PMI, ISM Services Index.
Earnings: Ciena, Lululemon, DocuSign, Zscaler, UiPath, Samsara, Asana.
Friday 4 September
Announcements: Nonfarm payrolls, unemployment rate, average hourly earnings.
Earnings: RH, Korn Ferry.
Friday’s employment report is the week’s main event. It will provide the clearest indication of whether the US labour market is continuing to weaken – and could materially alter expectations for the Federal Reserve’s next move. Broadcom’s results will also be closely watched for evidence that spending on AI infrastructure remains strong.
The Futures . . .
Not looking very nice. The Middle East situation seems to have escalated again, probably what is causing it.
Next week . . .
I have an announcement to make: my swansong wasn’t my swansong after all.
I have realised that books are no longer the best way for me to take ITM forward. The market is swamped with AI-produced books, leaving precious little room for actual human authors.
But people still need knowledge – they simply consume it differently. And that is where I am heading.
ITM may have a fantastic result, but I don’t expect anyone to accept it on trust. Everything I say is backed by data. I don’t conveniently discard anything that fails to fit.
So, I decided to make it easy for anyone to replicate the ITM results.
First, I updated the backtesting to 30 June 2026. Then AI rebuilt and checked the results using only the ITM rules and the raw data: date, opening price and closing price. The figures held up.
Now comes the real test: independent people replicating the results – or finding errors.
I have created a Replication Pack containing the data, rules, formulae and spreadsheets – the lot. Next week, I will invite you to download it and check the results for yourselves.
Think of it as beta testing before we go public.
So, onwards to the next stage of ITM!
Hoping for a great week!
Heather
Trade the tide not the waves.
