The Big Picture: A Cost Comparison of Futures and ETFs


Executive Summary
The specific products used in the analysis are the CME E-mini S&P 500 future and the three U.S. listed S&P 500 ETFs: the SPDR SPY, iShares IVV and Vanguard VOO.

The analysis begins with a detailed look at the components of total cost and the assumptions that underlie the calculations, which includes observations about recent changes in the implied financing rates of futures and the drivers of these moves.

The total cost of index replication across a range of time horizons is calculated for four common investment scenarios: a fully-funded long position, a leveraged long, a short position and a non-U.S. investor.

The choice between futures and ETFs is not an either-or decision. E-mini S&P 500 futures are shown to be more cost-effective than S&P 500 ETFs for leveraged, short and non-U.S. investors across all time horizons.

For fully-funded investors, the optimal choice is a function of futures implied financing and investment time horizon. When the roll cost of futures is sub-Libor, investors are unequivocally better served by futures, and if the roll cost is at a premium to Libor, the most cost efficient alternative could be either a future or an ETF.

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