Do ETFs have any advantage over Index Futures?
On the positive side, one can invest in Index futures without paying the complete value of the contract. The investors need to pay only the margin. They can also ‘sell’ contracts that are not in position. But the downside is that the investment timeframe is limited – futures contracts in India currently have a lifespan of 1 to 3 months. For holding for longer periods, investors would need to ‘roll over’ contracts, incurring transaction costs (brokerage). The trading risks in futures contracts are also higher. If the index moves in an opposite direction to your expectations, you may end up losing even more money than you have invested. That is the risk of leverage. It works both ways. You can have super-profits or super-losses. Index ETFs on the other hand, are cash market products. Investors can buy and hold them as long as they want without worrying about ‘roll over risks’. There are no daily mark-to-market or margin calls. Index funds are optimal for investors who prefer to take nomi
