Revealed: Stock Futures Cheaper Than ETFs

It’s no secret that we’re not a fan of Commodity ETFs vs their future counterparts with past posts titled: “Commodity ETFs Suck.” We have a running monthly table going that tracks a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year and in doing so take on costs the simple strategy does not have.

There’s one part of this discussion we’ve left out, the benefits and risks of Stock Futures Indices contracts, compared to their very popular ETF counterparts. Lucky for us, the CME group just released a succinct whitepaper titled, “The Big Picture: A Cost Comparison of Futures and ETFs.”

What we particularly enjoy was that they took the time to come up with multiple scenarios, and multiple short and long term investing options. Overall, here’s the conclusion the CME came to:

CME roll cost(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: CME Group

They actually calculate how much better futures are than ETFs in the report, although it’s spread around and a bit hard to find – but don’t worry, we’re here to help. Here’s the cost savings, per CME, of doing futures versus stock ETFs over 12 months given different ‘scenarios’.

bps cost of 12 months

Now, the $10,000 trader isn’t going to lose too much sleep over this – after all, 50bps is just $50 (0.50%*$10k). But 50bps might keep the institutional investor doing $100 million blocks of stock up at night. That’s $500,000 worth of cost savings someone might enjoy saving.

Curiously, it looks like the CME came out with this report just as the advantage has been shrinking – with the “implied financing cost” in the futures rolls getting more expensive, meaning more roll cost, meaning a tougher comparison to ETFs (but maybe that’s their angle, after all, coming out with this report to say “we’re still better, even though not as good”) Here’s the growth in the “cost” of rolling the ES over the past 3 years with their explanation:

Historically, the implied spread to Libor of ES futures was below the lowest management fees on any ETF. Over the 10 year period between 2002 and 2012,the ES futures roll averaged 2 bps below fair value.

Since 2012, the pricing of the roll has become more volatile and traded at higher levels as shown in Figure 1, with the richness averaging 35bps in 2013 and 26 bps in 2014.

This recent richness is attributable to two main factors: changes in the mix between natural sellers and liquidity providers on the supply-side of the market, and changes to the costs incurred by liquidity providers (particularly banks) in facilitating this service.

In a balanced market, natural buyers and sellers trade at a price close to fair value – neither party being in a position to extract a premium from the other. When no natural seller is available, a liquidity provider steps in to provide supply (i.e. sell futures) at a price. The greater the demand on liquidity providers, the higher (and more volatile) the implied funding costs will be.

The persistently strong S&P 500 returns over the last three years – averaging 20.3% annual growth since the start of 2012 – has caused a decrease in the size of the natural short base as investors reduce shorts and bias their positions towards long exposure. This has increased the demand on liquidity providers – especially U.S. banks – to meet the excess demand.

Beginning in 2013, however, changes in bank sector regulation have increased the capital and liquidity requirements for banks, making it more expensive for them to facilitate futures buyers. The result has been a higher implied financing cost in the futures rolls.

Roll Richness High Low(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: CME Group

Finally, we’re curious to see if the CME ever does such a report on commodity ETFs versus futures. We doubt they will, as the commodity ETFs (at least the ones not holding metals in a warehouse), actually use the CME’s products, holding futures on each commodity in the ETF.  The stock ETFs hold the actual stocks – making them a competitive target for the CME to try a convince people the futures are better than the stock holding ETFs. But the commodities – their winning no matter which structure you choose. But that doesn’t mean the investor is winning no matter which structure.

Speaking of which, we wouldn’t feel right discussing futures vs ETFs, without including our monthly table:

(Performance as of 2/27/15)

Attention: The internal data of table “47” is corrupted!

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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