Index Futures: Do They Deliver Efficient Beta?

Abstract

There are many choices for investment vehicles to gain index beta exposure. This study compares the historical efficiency in delivering beta through exchange-traded funds (ETFs) and index futures. Often, futures are seen as a more desirable beta solution relative to ETFs, because of their high daily notional trading, lack of management fees, and capital efficiency (only a portion of the notional amount is required as margin). When comparing the total cost of ownership between the two vehicles, however, futures may not always be the clear choice. In this case study, the authors analyze a full investment in S&P 500 Index e-Mini futures and compare the historical total returns with an equal notional investment in an S&P 500 ETF. They find that over a 10-year period the total return of the futures position has failed historically to match the total return of the index. The ETF, however, has tracked much closer to the benchmark, even after management fees. They attribute this slippage to three primary sources: failure to generate a yield on cash matching the rate used to calculate “fair value” futures, deviations in futures market prices from fair value, and differences in actual dividends from forecasted dividends.