How do ETFs compare with Index Futures?
Index Futures have gained wide acceptance globally as a tradeable means of shifting exposure to indices. Index Futures are advantageous when the implied cost of carry is less than the actual cost of carry. In addition, while an investment in ETFs requires investment of the entire notional value, futures requires posting of an initial collateral deposit and then daily market to market margins which represent a small fraction of the notional value, allowing leverage. ETFs are beneficial over Index Futures in many situations: – • When investors cannot or prefer not to trade index futures • When cash flows are small and investors do not have enough cash to purchase a futures contract • For longer-term horizons, index futures need to be rolled over every quarter which has its own risk and costs • If regulations prevent investors from investing in futures • Taxation issues: With Index Futures investors can avail of only short-term capital gains while with ETFs, investors can avail long-term
