Are Futures a Legitimate Proxy for the Stocks in the S&P 500?
S&P futures are an excellent substitute for owning the physical stocks in the index. This relationship holds because, when the index futures contracts expire every quarter, the final price is set equal to the value of the S&P 500 stock index. Although in the short term there can be some deviations between the cash index and the futures, over the long term the structure of the futures contract assures that the futures “track” the stocks. Indeed, one of the major benefits of a futures-based enhanced indexing strategy is that the futures provide 100% of the return of the S&P 500 stocks on a capitalization weighted basis. StocksPLUS seeks to achieve its excess return not by altering the price characteristics of the index but instead by altering the yield characteristics. The magnitude of risk in the yield component of the S&P 500 total return is much less than that of the price component. Therefore, the likelihood of StocksPLUS underperforming the index by a significant degree is, we belie
