Case Study: Finding an Efficient Hedge for Equity Sector Exposure
Client:
Trader seeking to hedge equity sector exposure
Challenge:
Creating the most capital-efficient way to trade a cross-sector portfolio
Solution:
Transition to CME Group Equity Sector futures
Overview
Over 15 years ago, CME Group introduced the first of many Equity Index Sector futures products. Today, nearly 20 products fall within the CME Group Equity Sector product suite. Recently, six new sector products were added, expanding access to Semiconductor, Biotechnology, and U.S. Regional Banks indices.
Sector futures products not only come with broad applications, they also can offer multiple capital efficiencies to a range of clients.
Compared to ETFs and swaps, CME Group Sector futures offer notable capital savings for clients looking to trade a portfolio. The following example shows the substantial difference in capital efficiency potential between the three ways to trade sector exposure. Learn more about the capital efficiencies found in Equity Index derivatives here.
Approach
Assume a trader is looking to trade a $300M portfolio across various sectors, using the most capital-efficient method. To determine which financial instrument to use, the trader completes a quick, high-level analysis of the capital required to purchase the same notional exposure across CME Group Sector futures, ETF equivalents, and a swap equivalent.
Table 1 shows the desired sector distribution for the portfolio in question, and the amount of margin or capital required to execute the trades using the three different types of trading instruments.
Table 1
*Futures margin as of February 2023. Source: CME Group
