Box spreads, which combine four options to create a market-neutral position, have surged in popularity, particularly among retail traders and financial advisors. As of last Friday, the value of open box-trade loans on S&P 500 options reached a record $146 billion, with average daily trading volumes exceeding $2.3 billion, a 26% increase from the previous year.
These trades offer yields over 4.4%, surpassing the returns on three-month Treasuries and the overnight SOFR rate. Henry Schwartz, VP of Derivatives Market Intelligence, noted that ETF sponsors and wealth advisors are increasingly utilizing these strategies due to their attractive interest rates.
The growth of box spreads, facilitated by ETFs like Alpha Architect's $15 billion 1-3 Month Box ETF (BOXX), reflects a broader trend of investors seeking tax-aware strategies and alternatives to fixed-income investments. However, the U.S. Treasury is monitoring these investment strategies for potential tax avoidance, which could lead to regulatory changes.
The rising popularity of box spreads may also exert pressure on the Federal Reserve to raise interest rates to remain competitive with these alternative investment options