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Minyan Mailbag

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

I notice the professors often mention a position in QQQ. When I want to trade the NDX, I trade the electronic futures at the CME. I find the commissions cheaper and the margin lower.

The futures just seem much more efficient to me. I mostly trade the S&P500, but I use futures here also instead of the SPYs. So is there some sort of benefit in using QQQ or SPY that I am not aware of? Perhaps a discussion in the school house about the differences, pros and cons, etc. in these instruments would be good for the Minyans?

Minyan JK


Minyan JK,

In order to trade futures, you first need to open a futures account with your broker; you don't need one for SPY or other ETFs. So first you must get this paper work out of the way.

As a speculator, you must post $20,000 ($16,000 for a hedger) to buy or sell a futures contract. One futures contract with the SP500 around 1100 represents $1100 x 250 (multiplier) = $275,000 in value. The margin to value ratio is $20,000/$275,000 = 7.3%. The margin for an ETF like any other stock is 50%. Clearly, futures are more "cash" efficient.

An ETF charges a small management fee of 18 basis points per year that are paid in the dividend flow through (not price), so the buyer is marginally disadvantaged to the advantage of a participant who is short. In other words, if you are long an ETF for two years, you will earn the dividend less 36 basis points. Futures do not incur any dividend flows: the present value of dividends is taken out of the price (and so too is the imbedded borrowing costs).

So far, futures seem to be a better vehicle. Liquidity is excellent in both, but you can also trade futures overnight, where ETFs stop trading.

The one negative in futures is that they expire. This necessitates that participants "roll" their position out if they want to maintain their exposure over an expiration. There is a cost to this.

As far as taxes go, futures are marked to market at the end of the year and taxes are owed on gains. ETFs are not subject to taxes until the position is closed out.

No positions in stocks mentioned.

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