Stock index futures vs. Exchange Traded funds

Transcription

1 Stock index futures vs. Exchange Traded funds (ETFs) TEXPERs 2015 San Antonio Educational Conference David Lerman Senior Director, Asset Managers CME Group Our Clients look to us to find cost effective and flexible ways To manage portfolio exposure needs on a daily basis. For the vast majority of our clients, we have found that futures may provide them the greatest flexibility to fulfill short term risk management and performance enhancement Goals such as cash equitization and securitization, portfolio rebalancing currency hedging and transition management. --Jack Hansen, CIO, Parametric Minneapolis Investor Center With S&P 500 futures, investors receive the total return of the S&P 500 index Less a money market rate-based funding cost, yet are only required to post a Small initial margin up front in char conctradst to the capital commitment plus Fees required to own the S&P 500 via an ETF. This allows innovative equity Investors, such as PIMCO, an opportunity to outperform the equity market Simply bgy seeking a return on the remaining capital in excess of money market Rates. --Sabrina Callin, Managing Director and StocksPlus Product Manager, PIMCO 2 1

2 Why do Institutions use Equity Index Futures? Extremely Cheap/Liquid Trade on Regulated exchanges Futures based margin and cash management CME Clearing House CCP Sub 2% 10 year Treasuries Portable Alpha Low Tracking errors No annual expense ratios 3 Global Equity Futures Landscape Leading Equity Index Futures (Sep 2014) 1 Future Contract ADVT $B OI $B Turnover / OI Exchange CSI 300 CFFEX % CFFEX S&P 500 E-mini % CME Eurostoxx % Eurex DAX % Eurex Nasdaq E-mini % CME KOSPI (KFE) % KFE Nikkei 225 Mini (OSE) % OSE HK Hang Seng Index % HKFE HSCEI (China) % China Dow Jones Mini % CME Russell 2000 Mini % ICE Nikkei 225 (OSE) % OSE FTSE % ICE CAC % ICE Taiex (TAFEX) % TAFEX TOPIX (OSE) % OSE Nikkei 225 (SGX) % SGX SGX China A % SGX 1) Source; Bloomberg, CSI, Reuters, and Goldman Sachs Equity Strats Group 4 2

3 Global ETF/ETP Assets Assets ($bn) (May) Source: BlackRock ETP Landscape May Futures vs. ETPs/Market share 6 3

4 Futures vs. ETFs The numbers. SPX ETP Complex ADVT ($B) Comparison - Rolling 3mo Avg. SPY US IVV US VOO US ES1/SP1 Multiplier May x Feb x Nov x Aug x May x Feb x Nov x YTD (Act) x Sector ETPs vs. Sector futures Market Share 7 Equity Index Complex Overview The global equity index complex represents over $4T in assets that are directly invested ( Indexed ) in equity benchmarks across: Listed Futures (OI), ETFs (AUM), and OTC Swaps & Forwards (Notional Outstanding) - This indexed exposure is approximately 5-7% of global equity market capitalization (YE 2013: $64T) 2 The remainder of global equity market capitalization on a net basis is either directly invested in the underlying securities or held in adjacent vehicles such as: mutual funds, OTC constructions (baskets or single stock), narrow-based futures, or non-delta one products Each participant in equity markets has unique mandates and preferred methods to achieve their required equity exposure Additionally, many participants operate on a hedged basis, and due to the high correlation and fungability of the complex, can achieve their mandate across a number of vehicles Equity Complex Overview 1 $4, % 49.5% 25.3% Equity products turnover, on average, 18.9% of indexed assets on a daily basis - $4.1B / 0.78B = 18.9% ETFs, while accounting for ~50% of indexed assets, represent less than 10% of notional turnover Conversely, listed futures represent over 60% of notional turnover despite accounting for only 25% of index assets 7.3% $ % 63.0% Indexed $B Turnover $B Listed Futures ETF OTC Swaps & Forwards 1) Source: Futures OI from Bloomberg avg. Jan-Sep /10/14. ETP data from Bloomberg Jan-Sep 2014 and Blackrock ETP Landscape (Sep 2014). OTC Swaps & Forwards Notional outstanding from BIS data as of 12/31/13; turnover calculated using Listed Futures turnover multiplied by relative share of OTC derivatives within Equity Linked securities (32%) per TABB Group: The Global Risk Transfer Market (November 2010) 2) Source: World Federation of Exchanges: 2013 WFE Market Highlights Jan

5 Users of equity index products have a number of options to meet Equity their exposure Product requirements, Landscape with the following slides providing detail on each sub-ecosystem Product Substitutes Advantages Index Futures Highly capital efficient Tax-friendly (participant-specific) Liquid and Transparent Immediate access to positive variation margin ETFs Single composite instrument in a securities account Numerous product choices, increasingly providing access to more granular exposure and alternative exposure (e.g. volatility). Relatively liquid with easy implementation Dealers can offer px guarantees and flexible order types OTC Swaps Anonymity Highly capital efficient Very flexible underlying exposure Can mitigate roll risk and dividend risk Dealers can offer px guarantees on index swaps and flexible order types (different rule for index and single names) Index Options Highly capital efficient Tax-friendly (participant specific) Liquid and transparent Accessible for securities accounts Disadvantages Required to roll Index futures limited to liquid benchmarks Not always block eligible and order types are constraining Can not be traded in a securities account Management fee Difficult to short (locate required) Higher margin Explicit financing with lower leverage Explicit disclosure (for 40 Act funds) Counterparty credit risk Onerous upfront documentation Operationally difficult Limited # of participants Regulatory uncertainty Only exist on major benchmarks Higher touch (cash index options) 9 E-mini S&P 500 futures vs. S&P 500 SPDRs (SPY) E-mini S&P 500 S&P 500 SPDRs Where Traded: CME Group Various exchanges Ticker symbol: ES SPY Underlying cash S&P 500 cash S&P 500 Minimum tick 0.25 ($12.50).01 Notional or Dollar value $ 100,000 $ Ave. Daily volume** 1.7 million 170 million Ave. Daily $volume $ 173 billion $ 24 billion Margin 4.6% ($4,600) 50% Reg T margin FRBNY Transaction costs 1 basis pt 1 basis pt Management fee n/a.09 annually 24 hour trading nearly 24 hours?? Options yes yes Tax Treatment (60/40) no 60/40, LTCG applies Source: David Lerman, Senior Director, Client Dev. And Sales-- Asset Managers 10 5

6 Treasury Bond Futures vs. ishares 20 yr Treasury Trust (TLT) T-Bond futures ishares 20 yr Treasury Bd Fund Where Traded: CME Group Various exchanges Ticker symbol: US TLT Underlying Cash 30-yr T-bond* US T-bonds portfolio Minimum tick ½ of 1/32 nd ($15.63).01 Notional or Dollar value $ 100,000 $130 a share Ave. Daily volume** 356,000 contracts 9.54 million shares Ave. Daily $volume $ 35.6 billion $ 1.24 billion Margin 3.4% ($3,400) 50% Reg T margin FRBNY Transaction costs 1 basis pt 1 basis pt Management fee n/a.15 annually 24 hour trading nearly 24 hours?? Options yes yes Tax Treatment section 1256 (60/40) no 60/40, LTCG applies Source: David Lerman, Senior Director, Client Dev. And Sales-- Asset Managers * The T-bond contract typically tracks the CTD long bond. In addition, several cash bonds can be delivered into the contract at delivery ** ADV YTD October 12, CME 10-yr Treasury Note Futures vs. ishares 7-10 yr Treasury ETF 10 yr T-note futures ishares 7-10 yr Treasury Trust Where Traded: CME Group Various exchanges Ticker symbol: TN IEF Underlying CTD Cash 10-yr T-note portfolio of US T-notes Notional amt 100,000 n/a Minimum tick half of 1/32 nd ($15.63).01 Notional or Dollar value $100,000 $107.9 share Ave. Daily volume 1,409,000 contracts 1,900,000 shares Ave. Daily $ Notional volume $141 billion $.21 billion Margin 1.35 percent ($1,350) 50% Reg T margin FRBNY Transaction costs less than 1 basis pt 1 basis pt Annual Management fee zero 15 basis points 24 hour trading nearly 24 hours?? Options yes yes Tax Treatment section 1256 (60/40) no 60/40, LTCG applies Source: David Lerman, Senior Director, Asset Managers, CME Group 12 6

7 Gold Futures vs. Gold ETF Comex Gold SPDR Gold Trust Where Traded: CME Group Securities exchanges Ticker symbol: GC GLD Underlying Gold Creation Unit minimum/gold Multiplier 100 1/10 price of metal Dollar value $120,000 $116.9 Minimum tick.10 pts.01 Ave. Daily volume 188k contracts 7.94 million shares Ave. Daily $volume $22.9 bn $.875 billion Margin 3.1% $3,750 50% Reg T margin FRBNY Transaction costs 1 basis pt 1 basis pt Management fee zero.40 annually 24 hour trading nearly 24 hours?? Options yes yes Tax Treatment section 1256 (60/40) no 60/40, LTCG applies Tracking issues tracks well with cash doesn t track cash as well as futures Source: David Lerman, Senior Director, Asset Managers 13 CME Group Crude Oil Futures vs. USO Oil ETF Crude Oil futures USO Oil ETF Where Traded: CME Group NYSE ARCA Ticker symbol: CL USO Underlying Light sweet crude WTI spot crude Multiplier 1000 bbls of WTI n/a Dollar value $50, Minimum tick.01 dollars.01 dollars Ave. Daily volume* 896,000 contracts 37.9 million shares Ave. Daily $volume* $45 billion $ billion Margin Various 50% Reg T margin FRBNY Transaction costs 1 basis pt 3 basis pts Management fee zero. 45 % annually 24 hour trading nearly 24 hours no 24 hour trading Options yes yes Tax Treatment section 1256 (60/40) no 60/40, LTCG applies Source: David Lerman, CME Group. 14 7

8 CME Group EuroFX Futures vs Euro Currency Shares ETF Euro futures Euro Currency Shares Where Traded: CME Group NYSE ARCA Ticker symbol: EC FXE Underlying Euro Currency Euro / Grantor Trust Multiplier 125,000 Euro 100 Euro/share Notional value $ 143,800 $ Minimum tick.0001 pts ($12.50).01 dollars Ave. Daily volume* 325,000 contracts 1,140,000 Ave. Daily $volume* $38 billion $.126 billion Margin $3,000 (2.9%) 50% Reg T margin FRBNY Management fee zero. 40 % annually 24 hour trading nearly 24 hours no 24 hour trading Options yes yes Tax Treatment 60/40 treatment no 60/40, LTCG applies Source: David Lerman, Senior Director, Asset Managers 15 Summary of Assumptions (in basis points) Product Execution Fees Market Impact Holding Cost ES SPY IVV VOO

9 Cost Estimate and Assumptions Total Cost Analysis of a $100 Million investment in the S&P 500 Index Holding Costs: Management Fees SPDR SPY ishares IVV Vanguard VOO 9.45 bps per annum 7.00 bps per annum 5.00 bps per annum Roll Cost/Implied Financing Rate E-mini S&P bps per annum Margin Rates ETFs Securities Account, Reg T 50% Prime Brokerage, Reg U 12.5% - 20% E-mini S&P 500 ~5.0% 4 4 Margin at the time of this report being published is $4,600 per contract (approx. ES contract value is $100,000) Margin amounts are subject to change Futures Roll Cost and Implied Financing How does the richness or cheapness of the roll impact futures holding costs? Figure 1: Roll Richness with High/Low Range Average Weighted Roll (3 Weeks Prior to Expiration) Source: CME Group High Low Average Daily Roll Rate Range

10 Scenario 1: Fully-Funded Investor Fully-funded, passive investor who is looking at a longterm buy and hold strategy Figure 2: Fully-funded Investor, 6 Months Source: CME Group Scenario 1: Fully-Funded Investor What happens as the Roll Cost and Implied Financing Normalize? Figure 3: Fully-funded Investor, 12 Months Source: CME Group

11 Scenario 2: Leveraged Investor $100 Million of S&P 500 Exposure for the 2x Leveraged ($50M) and 8x Leveraged ($12.5M) Investor Figure 4: Total Cost for 2x and 8x Leverage, 12 Months Source: CME Group, Average Total Cost for SPY, IVV, and VOO used for graphical representation Scenario 3: Short Investor Short Positions provide negative market exposure and are inherently leveraged. Figure 5: Short Futures vs. ETF, 12 months Source: CME Group, Average Total Cost for SPY, IVV, and VOO used for graphical representation

12 Scenario 4: International Investor What are the withholding implications of ETFs and Futures; how does this impact cost? Figure 6: Foreign Investor (30% WHT), 12 Months Source: CME Group

13 Conclusion In all scenarios but one, futures provide a more cost-effective vehicle for replicating the S&P 500. Most Cost Effective Choice SCENARIO SHORT TERM (Less than 3M) LONG TERM (More than 3M) Fully-Funded FUTURES ETFs Leveraged (2x, 8x) FUTURES FUTURES Short Investor FUTURES FUTURES International FUTURES FUTURES However, that is only a statement on cost. Is liquidity more important? Product Aum/OI ($Bn) ADV ($Bn) ES SPY IVV VOO