Futures versus ETFs

In 1997, four years after the launch of the first ETF (Exchange Traded Fund), CME Group introduced the E-mini S&P 500 futures. While futures had been trading since the mid-1800s, the launch of the E-mini was significant in two ways:

  • The E-mini was the first contract structured as a bite-size, investor-friendly futures contract. It was designed to be one-fifth the size of standard S&P 500 futures.
  • The new contract was traded exclusively, electronically on CME Globex, a trade matching system and traded nearly 24 hours a day.

Did you know: E-mini S&P 500 futures trades more average daily dollar volume than all 6,800 ETFs around the globe

Both products, futures and Exchange Traded Funds, went on to become very popular. In fact, the E-mini S&P 500 went on to become the most liquid stock index futures contract in the world, based on open interest and volume. When you compare futures like the E-mini S&P 500 with ETFs, it should come as no surprise why futures far out-trade ETFs. We created this module, so you could see the advantages of trading futures over ETFs.

A Comparison

Compare futures with ETFs and see why futures are the more compelling instrument.

Benefit Futures ETFs
Management fees None, there are no annual management fees. ETFs have annual management fees.
Capital efficiencies Futures margin is capital-efficient with performance bond margins usually less than 5% of notional amount. Reg T margins with stocks and ETFs are 50% of the value of the stock or ETF. This is far larger than futures.
24-hour trading access Yes, trades nearly 24 hours, six days a week While some firms offer after-hours trading, ETFs cannot be traded 24hours-a-day.
Liquidity Primary futures contracts such as the E-mini S&P 500, Treasuries, Crude, Metals all far out-trade in dollar terms their ETF counterpart. Good liquidity but not as much critical mass as futures.
Tracking to underlying Futures track underlying very closely, with little tracking error. Some ETFs have major tracking error.
Tax advantages A profitable short-term trade with futures will pay less in taxes than with an ETF do to IRS Section 1256 treatment (60/40 blend of short and long term gains) All short-term profits with ETFs pay ordinary income rates.

Average Daily Dollar Volume Comparison

Clearly, futures offer some compelling advantages to large and small investors alike. In fact, if you look at the average daily dollar volume comparisons between futures and their corresponding ETF, you will notice that futures trade multiple dollar amounts of their ETF counterpart. Treasuries, Crude oil and Gold trade 20-600 times greater dollar value than ETFs each day. The E-mini S&P 500 alone outtrades all ETFs around the world by a factor of 2.56 times.

Figure 2: Source: CME Group, Bloomberg

While it is true that both futures and ETFs are regarded as two of the most successful instruments ever introduced, futures hold the lead in many categories in a head-to-head comparison. Many leading money managers have gone on record extolling the benefits of futures when compared with ETFs.

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