Index futures instead of etf to avoid withholding tax

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Topic Author
shcnno
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Index futures instead of etf to avoid withholding tax

Post by shcnno » Thu Mar 07, 2019 10:26 pm

I don't know much about futures, but is it possible to use futures in place of a index etf to avoid dividends and then US withholding tax for NRA?

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cheese_breath
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Re: Index futures instead of etf to avoid withholding tax

Post by cheese_breath » Thu Mar 07, 2019 10:41 pm

shcnno wrote:
Thu Mar 07, 2019 10:26 pm
I don't know much about futures, but is it possible to use futures in place of a index etf to avoid dividends and then US withholding tax for NRA?
NRA... National Rifle Association? National Recovery Association?
The surest way to know the future is when it becomes the past.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Thu Mar 07, 2019 11:10 pm

cheese_breath wrote:
Thu Mar 07, 2019 10:41 pm
shcnno wrote:
Thu Mar 07, 2019 10:26 pm
I don't know much about futures, but is it possible to use futures in place of a index etf to avoid dividends and then US withholding tax for NRA?
NRA... National Rifle Association? National Recovery Association?
As this is the non US investing sub I thought you might think of aliens before guns.

AlohaJoe
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Re: Index futures instead of etf to avoid withholding tax

Post by AlohaJoe » Thu Mar 07, 2019 11:22 pm

shcnno wrote:
Thu Mar 07, 2019 10:26 pm
I don't know much about futures, but is it possible to use futures in place of a index etf to avoid dividends and then US withholding tax for NRA?
Aren't index futures only on the price, not the total return?

It seems like you'd be throwing away $0.70 so you didn't have to pay $0.30?

I think a better solution is to invest in an index fund that is not based in America, like the many that are available on the London Stock Exchange.

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Fri Mar 08, 2019 1:16 am

A few years ago, it's practical to use s&p 500 future instead of etf when the implied interest of future were quite low. However, the implied interest is much higher currently.

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Fri Mar 08, 2019 1:34 am

The current implied financing rate of s&p 500 is about 2.72%. Therefore, the question is whether you can find somewhere to park your cash with decent interest rate. If you can get 2.5% for floating cash, losing 0.22% per year might be better than paying the tax. But if you only earn 2% for floating cash, the idea is less attractive.

TedSwippet
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Re: Index futures instead of etf to avoid withholding tax

Post by TedSwippet » Fri Mar 08, 2019 3:43 am

cheese_breath wrote:
Thu Mar 07, 2019 10:41 pm
NRA... National Rifle Association? National Recovery Association?
Search results for 'NRA' - Bogleheads

DJN
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Re: Index futures instead of etf to avoid withholding tax

Post by DJN » Fri Mar 08, 2019 3:49 am

Hi,
perhaps a synthetic based etf might help your quest, have a look at this post:
viewtopic.php?f=22&t=248776
DJN

TedSwippet
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Re: Index futures instead of etf to avoid withholding tax

Post by TedSwippet » Fri Mar 08, 2019 4:08 am

AlohaJoe wrote:
Thu Mar 07, 2019 11:22 pm
Aren't index futures only on the price, not the total return? ... It seems like you'd be throwing away $0.70 so you didn't have to pay $0.30?
I know just about nothing about futures, but wouldn't the price on which the contract is based take into account any anticipated drop in an ETF's NAV from the dividend declaration? Otherwise, it seems like there would be a free lunch somewhere in here for somebody.

Avoiding US dividend tax by holding futures contracts is apparently exactly what the US's ridiculously complex section 871(m) tax regulation aims to extinguish.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Fri Mar 08, 2019 7:20 am

daze wrote:
Fri Mar 08, 2019 1:34 am
The current implied financing rate of s&p 500 is about 2.72%. Therefore, the question is whether you can find somewhere to park your cash with decent interest rate. If you can get 2.5% for floating cash, losing 0.22% per year might be better than paying the tax. But if you only earn 2% for floating cash, the idea is less attractive.
Should be quite easy to get 2.4% or so from t-bills.
I don't quite know how futures work, where to start?
You only pay (or gain) at the agreed mature date, so you get to keep the cash until then?
Does worldwide index futures exists?

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Fri Mar 08, 2019 8:16 am

shcnno wrote:
Fri Mar 08, 2019 7:20 am
daze wrote:
Fri Mar 08, 2019 1:34 am
The current implied financing rate of s&p 500 is about 2.72%. Therefore, the question is whether you can find somewhere to park your cash with decent interest rate. If you can get 2.5% for floating cash, losing 0.22% per year might be better than paying the tax. But if you only earn 2% for floating cash, the idea is less attractive.
Should be quite easy to get 2.4% or so from t-bills.
I don't quite know how futures work, where to start?
You only pay (or gain) at the agreed mature date, so you get to keep the cash until then?
Does worldwide index futures exists?
While you don't need to pay the cash when you buy a future, E-mini S&P 500 future will mark-to-market, and your cash balance will be subjected to change accordingly. Therefore, in a volatile market, a large decreasing of cash balance can be possible.
While T-bill usually has very minimal margin requirement such as 3% or so, and a margin call is unlikely, interest can be charged among negative cash balance.

To my knowledge, there's no worldwide index futures with very good volume and liquidity.

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David Jay
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Re: Index futures instead of etf to avoid withholding tax

Post by David Jay » Fri Mar 08, 2019 9:02 am

shcnno wrote:
Fri Mar 08, 2019 7:20 am
I don't quite know how futures work, where to start?
Futures are not a consumer financial product. You don’t just “buy futures” instead of an ETF.

You need to lay out a significant education project for yourself before proceeding.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Fri Mar 08, 2019 9:06 am

shcnno wrote:
Fri Mar 08, 2019 7:20 am
Should be quite easy to get 2.4% or so from t-bills.
Two or three years ago, I bought a contract of E-mini S&P 500 future, when the implied financing rate was about 1.3%, and paired them with 2-year treasury which yielded 0.1% or 0.2% more. All seemed fine at that moment, until FED hiked for a few times.

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cheese_breath
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Re: Index futures instead of etf to avoid withholding tax

Post by cheese_breath » Fri Mar 08, 2019 9:33 am

TedSwippet wrote:
Fri Mar 08, 2019 3:43 am
cheese_breath wrote:
Thu Mar 07, 2019 10:41 pm
NRA... National Rifle Association? National Recovery Association?
Search results for 'NRA' - Bogleheads
Thanks. The only other things I could think of were Norman Rockwell Archives and Non Recognized Acronym.
The surest way to know the future is when it becomes the past.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Tue Mar 12, 2019 11:07 pm

As I'm reading more about futures and the e-mini 500, I can't see how this should be much different or more risky compared to buying the ETFs, if you hold the future without margin. So if you have t-bonds for the full amount to cover the future, then it seems to be very similar to holding the ETF.
daze wrote:
Fri Mar 08, 2019 9:06 am
Two or three years ago, I bought a contract of E-mini S&P 500 future, when the implied financing rate was about 1.3%, and paired them with 2-year treasury which yielded 0.1% or 0.2% more. All seemed fine at that moment, until FED hiked for a few times.
How does this affect the price of the future in another way than it affects the price of the ETF?

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whodidntante
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Re: Index futures instead of etf to avoid withholding tax

Post by whodidntante » Tue Mar 12, 2019 11:20 pm

shcnno wrote:
Tue Mar 12, 2019 11:07 pm
As I'm reading more about futures and the e-mini 500, I can't see how this should be much different or more risky compared to buying the ETFs, if you hold the future without margin. So if you have t-bonds for the full amount to cover the future, then it seems to be very similar to holding the ETF.
People have different ideas of risk. Other posters may not match yours. But I'm not sure what you are saying. Are you going to keep the full notional value of the contract in cash and top up daily?

You might need to be playing a big game to use T-bills for the performance bond, FYI. Your broker will tell you the minimum for that, if they will let you do it at all.

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shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Tue Mar 12, 2019 11:40 pm

Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?

typical.investor
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Re: Index futures instead of etf to avoid withholding tax

Post by typical.investor » Wed Mar 13, 2019 12:54 am

shcnno wrote:
Tue Mar 12, 2019 11:07 pm
As I'm reading more about futures and the e-mini 500, I can't see how this should be much different or more risky compared to buying the ETFs, if you hold the future without margin. So if you have t-bonds for the full amount to cover the future, then it seems to be very similar to holding the ETF.
daze wrote:
Fri Mar 08, 2019 9:06 am
Two or three years ago, I bought a contract of E-mini S&P 500 future, when the implied financing rate was about 1.3%, and paired them with 2-year treasury which yielded 0.1% or 0.2% more. All seemed fine at that moment, until FED hiked for a few times.
How does this affect the price of the future in another way than it affects the price of the ETF?
Bond lost money (NAV loss to to rising rates). If you simply had bought the S&P ETF with cash, the FED hike and resultant bond loss wouldn't have affected you.
shcnno wrote:
Tue Mar 12, 2019 11:40 pm
Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Wed Mar 13, 2019 1:09 am

typical.investor wrote:
Wed Mar 13, 2019 12:54 am
shcnno wrote:
Tue Mar 12, 2019 11:07 pm
As I'm reading more about futures and the e-mini 500, I can't see how this should be much different or more risky compared to buying the ETFs, if you hold the future without margin. So if you have t-bonds for the full amount to cover the future, then it seems to be very similar to holding the ETF.
daze wrote:
Fri Mar 08, 2019 9:06 am
Two or three years ago, I bought a contract of E-mini S&P 500 future, when the implied financing rate was about 1.3%, and paired them with 2-year treasury which yielded 0.1% or 0.2% more. All seemed fine at that moment, until FED hiked for a few times.
How does this affect the price of the future in another way than it affects the price of the ETF?
Bond lost money (NAV loss to to rising rates). If you simply had bought the S&P ETF with cash, the FED hike and resultant bond loss wouldn't have affected you.
shcnno wrote:
Tue Mar 12, 2019 11:40 pm
Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.
Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Fri Mar 15, 2019 11:38 pm

shcnno wrote:
Tue Mar 12, 2019 11:07 pm
As I'm reading more about futures and the e-mini 500, I can't see how this should be much different or more risky compared to buying the ETFs, if you hold the future without margin. So if you have t-bonds for the full amount to cover the future, then it seems to be very similar to holding the ETF.
daze wrote:
Fri Mar 08, 2019 9:06 am
Two or three years ago, I bought a contract of E-mini S&P 500 future, when the implied financing rate was about 1.3%, and paired them with 2-year treasury which yielded 0.1% or 0.2% more. All seemed fine at that moment, until FED hiked for a few times.
How does this affect the price of the future in another way than it affects the price of the ETF?

You pay for the implied financing rate of a future via the dividend not earned and via the contango when you rollover.
For e-mni S&P 500, you usually rollover every 3 months because contract more than 3 months has much less liquidity.
The dividends are also paid every 3 months.

In some sense, e-mni S&P 500 future is as-if a perfect tracking ETF plus a short position of 3-month bond with the implied financing rate.
If you pair it to 3-month treasury, ideally the long and short positions of bond effectively cancel out, and leave you a perfect tracking ETF.
However, usually the implied financing rate is higher than the 3-month treasury rate, and the difference is at your cost.

If you pair it to a longer-term treasury, the treasury yield may be high enough to offset the implied financing rate. (Not always true since yield curve may invert.)
However, in other words, you are longing a longer-term bond and shorting a shorter-term bond, and it can cause some risks you may or may not want to take.

daze
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Re: Index futures instead of etf to avoid withholding tax

Post by daze » Sat Mar 16, 2019 12:59 am

shcnno wrote:
Wed Mar 13, 2019 1:09 am
typical.investor wrote:
Wed Mar 13, 2019 12:54 am
shcnno wrote:
Tue Mar 12, 2019 11:40 pm
Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.
Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
There will not be a margin call, but margin interest will be charged on the -5k cash balance.
IB charges 3.9%. And some brokers charge twice or even more.
To avoid paying the margin interest, you either sell some treasury (might be at loss), or top up with cash.
It's probably not too hard to top up with 5k, but if S&P 500 drop to 1500...

The strategy is not impossible, and I've tried it myself before.
And it is not very risky. If your broker is not particularly nasty, you at most lossing 2-3% more than directly buying S&P 500 ETF.
But make sure you know what you are doing before try it.

long_gamma
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Re: Index futures instead of etf to avoid withholding tax

Post by long_gamma » Sat Mar 16, 2019 7:03 am

Ignore lot of bad information in this thread.

If you hold emini and rest in t-bills there is no difference than holding etf. In fact you can do better, buy a fraction of the amount in CD and future+ rest in t-bill, then you will do better.

Don't know what NRA means, but you have better tax treatment (US resident) for future than ETF, if you are holding ETF for less than a year.

In spite of advise index futures are not liquid, they are pretty liquid and has advantage of trading round the clock. Emini ES can trade 10's of million notional with 1 tick wide. Even other like NQ, Eurostoxx (europe), Kospi (korean) are pretty liquid.

Regarding margin CME website lists their requirement, broker can have more (not less for overnight margin) than that requirement. These margin's are not similar to stock margin as some suggested. Pure future brokers adhere to CME requirement, but Interactive Brokers are much more stringent usually has slightly higher requirement.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

TedSwippet
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Re: Index futures instead of etf to avoid withholding tax

Post by TedSwippet » Sat Mar 16, 2019 10:50 am

long_gamma wrote:
Sat Mar 16, 2019 7:03 am
Don't know what NRA means, but you have better tax treatment (US resident) for future than ETF, if you are holding ETF for less than a year.
Search results for 'NRA' - Bogleheads. A US NRA is not a US resident.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Sun Mar 17, 2019 10:39 pm

daze wrote:
Sat Mar 16, 2019 12:59 am
shcnno wrote:
Wed Mar 13, 2019 1:09 am
typical.investor wrote:
Wed Mar 13, 2019 12:54 am
shcnno wrote:
Tue Mar 12, 2019 11:40 pm
Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.
Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
I thought that as long as you don't sell the futures you don't have to pay margin interest on them..? As there will not be a margin call if you have still 125K in bonds in the account.
Do you have to pay margin interest when holding futures?

Topic Author
shcnno
Posts: 57
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Sun Mar 17, 2019 11:01 pm

long_gamma wrote:
Sat Mar 16, 2019 7:03 am
Ignore lot of bad information in this thread.

If you hold emini and rest in t-bills there is no difference than holding etf. In fact you can do better, buy a fraction of the amount in CD and future+ rest in t-bill, then you will do better.

Don't know what NRA means, but you have better tax treatment (US resident) for future than ETF, if you are holding ETF for less than a year.

In spite of advise index futures are not liquid, they are pretty liquid and has advantage of trading round the clock. Emini ES can trade 10's of million notional with 1 tick wide. Even other like NQ, Eurostoxx (europe), Kospi (korean) are pretty liquid.

Regarding margin CME website lists their requirement, broker can have more (not less for overnight margin) than that requirement. These margin's are not similar to stock margin as some suggested. Pure future brokers adhere to CME requirement, but Interactive Brokers are much more stringent usually has slightly higher requirement.
Thanks for your feedback!
I'll experiement with this in a paper account until I see more how it works.
How could we replicate a worldwide etf like VT with futures? emini+eurostxx+ some emerging market future?

typical.investor
Posts: 616
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Re: Index futures instead of etf to avoid withholding tax

Post by typical.investor » Sun Mar 17, 2019 11:22 pm

shcnno wrote:
Sun Mar 17, 2019 10:39 pm
daze wrote:
Sat Mar 16, 2019 12:59 am
shcnno wrote:
Wed Mar 13, 2019 1:09 am
typical.investor wrote:
Wed Mar 13, 2019 12:54 am
shcnno wrote:
Tue Mar 12, 2019 11:40 pm
Ok, as an example, the e-mini 500 seems to equal around $140,000 of stock value. So say I have $140,000 I'd like to either buy etf's for or futures. Then I could buy bonds for $125,000 or so (and get 2.4% interest), and then buy one e-mini future that will resemble the movements of $140,000 in a sp500 etf.
As the future move up or down, I don't see why I should need to top up if I have $140,000 in cash/bonds in the account. Could a single future lose more than $140,000 ?
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.
Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
I thought that as long as you don't sell the futures you don't have to pay margin interest on them..? As there will not be a margin call if you have still 125K in bonds in the account.
Do you have to pay margin interest when holding futures?
I think you don’t understand how margin with futures work. To start your e-mini (or nay futures) position, you have an initial margin requirement.

If the value of your position drops, the drop will be taken from your margin deposit. If your margin deposit goes below the margin maintenance amount, you will be forced to deposit more money and bring your margin deposit back to the initial margin requirement. If you fail to do so, you will be forced out of your position.

Note: margin requirements can and do change particularly in very volitile markets which may mean the amount you need goes up.

So if the S&P drops much, you can’t keep all of the 125k in bonds. Some of it will need to be used to bring your margin deposit back up to a safe level.

It not margin interest so to speak, it’s an amount to make sure your account gets balanced each day. The opposite is tru too. If the market goes up, you will have more in your margin account.

Topic Author
shcnno
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Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Sun Mar 17, 2019 11:41 pm

typical.investor wrote:
Sun Mar 17, 2019 11:22 pm
shcnno wrote:
Sun Mar 17, 2019 10:39 pm
daze wrote:
Sat Mar 16, 2019 12:59 am
shcnno wrote:
Wed Mar 13, 2019 1:09 am
typical.investor wrote:
Wed Mar 13, 2019 12:54 am
I don't believe bonds in your account work for margin. I think it has to be cash.

The bonds you bought can lose value if rates rise. Of course, the bonds will recover their NAV if you hold them to duration, but since you may need to sell them to put cash into your account for margin purposes, it's possible you suffer a loss that you wouldn't have if holding the ETF directly. And oppositely, if rates drop you could experience a gain. Or there could be no difference.
Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
I thought that as long as you don't sell the futures you don't have to pay margin interest on them..? As there will not be a margin call if you have still 125K in bonds in the account.
Do you have to pay margin interest when holding futures?
I think you don’t understand how margin with futures work. To start your e-mini (or nay futures) position, you have an initial margin requirement.

If the value of your position drops, the drop will be taken from your margin deposit. If your margin deposit goes below the margin maintenance amount, you will be forced to deposit more money and bring your margin deposit back to the initial margin requirement. If you fail to do so, you will be forced out of your position.

Note: margin requirements can and do change particularly in very volitile markets which may mean the amount you need goes up.

So if the S&P drops much, you can’t keep all of the 125k in bonds. Some of it will need to be used to bring your margin deposit back up to a safe level.

It not margin interest so to speak, it’s an amount to make sure your account gets balanced each day. The opposite is tru too. If the market goes up, you will have more in your margin account.
Thanks, I guess what I don't fully understand is that I can't use t-bills for the margin maintenance requirement. As no cash is paid to to the other party until you close the position, I don't understand why I have to borrow money from the broker. I understand that there is a margin requirement, so that the broker and the other party don't risk that you can't pay what you own when you close the position.

typical.investor
Posts: 616
Joined: Mon Jun 11, 2018 3:17 am

Re: Index futures instead of etf to avoid withholding tax

Post by typical.investor » Mon Mar 18, 2019 12:26 am

shcnno wrote:
Sun Mar 17, 2019 11:41 pm
typical.investor wrote:
Sun Mar 17, 2019 11:22 pm
shcnno wrote:
Sun Mar 17, 2019 10:39 pm
daze wrote:
Sat Mar 16, 2019 12:59 am
shcnno wrote:
Wed Mar 13, 2019 1:09 am


Bonds works for margin. For T-Bonds the margin requirements are only 1% for duration less than 6 months and 2% for 1 year.

Yes I realize a bond fund could loose value, but a t-bond of short expiry will not, or it doesn't matter if you can hold it to expiry.
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
I thought that as long as you don't sell the futures you don't have to pay margin interest on them..? As there will not be a margin call if you have still 125K in bonds in the account.
Do you have to pay margin interest when holding futures?
I think you don’t understand how margin with futures work. To start your e-mini (or nay futures) position, you have an initial margin requirement.

If the value of your position drops, the drop will be taken from your margin deposit. If your margin deposit goes below the margin maintenance amount, you will be forced to deposit more money and bring your margin deposit back to the initial margin requirement. If you fail to do so, you will be forced out of your position.

Note: margin requirements can and do change particularly in very volitile markets which may mean the amount you need goes up.

So if the S&P drops much, you can’t keep all of the 125k in bonds. Some of it will need to be used to bring your margin deposit back up to a safe level.

It not margin interest so to speak, it’s an amount to make sure your account gets balanced each day. The opposite is tru too. If the market goes up, you will have more in your margin account.
Thanks, I guess what I don't fully understand is that I can't use t-bills for the margin maintenance requirement. As no cash is paid to to the other party until you close the position, I don't understand why I have to borrow money from the broker. I understand that there is a margin requirement, so that the broker and the other party don't risk that you can't pay what you own when you close the position.
I don't think you are borrowing from your broker.

If I short with an e-mini, and you go long, and the market drops every day for a week, money will go into my account after each day. Where does that money come from?

Why should the person on the other side of the trade have to wait for settlement?

And what if I shorted for that week and wanted to get out? You are still long and not selling. If you kept the money in your account, how could I get out with my profits? Would I be able to exit my position if it had an IOU tagged on to it from your promise to pay? Who would buy that?

I'm only looking into and don't trade them now, but don't know of anyplace that doesn't require daily cash settlement.

Topic Author
shcnno
Posts: 57
Joined: Tue May 09, 2017 10:56 am

Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Mon Mar 18, 2019 12:36 am

typical.investor wrote:
Mon Mar 18, 2019 12:26 am
shcnno wrote:
Sun Mar 17, 2019 11:41 pm
typical.investor wrote:
Sun Mar 17, 2019 11:22 pm
shcnno wrote:
Sun Mar 17, 2019 10:39 pm
daze wrote:
Sat Mar 16, 2019 12:59 am
Let's take a look for your example.

You buy 125k bonds at 2.4% interest and leave 15k cash in the account.
If S&P 500 drop to 2400, just as last December, 20k cash will be removed from your account as a result of mark-to-market.
Now the account will be 125k bond and -5k cash.
I thought that as long as you don't sell the futures you don't have to pay margin interest on them..? As there will not be a margin call if you have still 125K in bonds in the account.
Do you have to pay margin interest when holding futures?
I think you don’t understand how margin with futures work. To start your e-mini (or nay futures) position, you have an initial margin requirement.

If the value of your position drops, the drop will be taken from your margin deposit. If your margin deposit goes below the margin maintenance amount, you will be forced to deposit more money and bring your margin deposit back to the initial margin requirement. If you fail to do so, you will be forced out of your position.

Note: margin requirements can and do change particularly in very volitile markets which may mean the amount you need goes up.

So if the S&P drops much, you can’t keep all of the 125k in bonds. Some of it will need to be used to bring your margin deposit back up to a safe level.

It not margin interest so to speak, it’s an amount to make sure your account gets balanced each day. The opposite is tru too. If the market goes up, you will have more in your margin account.
Thanks, I guess what I don't fully understand is that I can't use t-bills for the margin maintenance requirement. As no cash is paid to to the other party until you close the position, I don't understand why I have to borrow money from the broker. I understand that there is a margin requirement, so that the broker and the other party don't risk that you can't pay what you own when you close the position.
I don't think you are borrowing from your broker.

If I short with an e-mini, and you go long, and the market drops every day for a week, money will go into my account after each day. Where does that money come from?

Why should the person on the other side of the trade have to wait for settlement?

And what if I shorted for that week and wanted to get out? You are still long and not selling. If you kept the money in your account, how could I get out with my profits? Would I be able to exit my position if it had an IOU tagged on to it from your promise to pay? Who would buy that?

I'm only looking into and don't trade them now, but don't know of anyplace that doesn't require daily cash settlement.
Ok, I'm waiting for others to chime in. But I don't think these have daily cash settlement, then what would be the point of a future expiring at a certain future date? The futures settle at a agreed date. If you want your money sooner you can sell the future before that date. This is my understanding.

typical.investor
Posts: 616
Joined: Mon Jun 11, 2018 3:17 am

Re: Index futures instead of etf to avoid withholding tax

Post by typical.investor » Mon Mar 18, 2019 12:55 am

shcnno wrote:
Mon Mar 18, 2019 12:36 am
typical.investor wrote:
Mon Mar 18, 2019 12:26 am


I don't think you are borrowing from your broker.

If I short with an e-mini, and you go long, and the market drops every day for a week, money will go into my account after each day. Where does that money come from?

Why should the person on the other side of the trade have to wait for settlement?

And what if I shorted for that week and wanted to get out? You are still long and not selling. If you kept the money in your account, how could I get out with my profits? Would I be able to exit my position if it had an IOU tagged on to it from your promise to pay? Who would buy that?

I'm only looking into and don't trade them now, but don't know of anyplace that doesn't require daily cash settlement.
Ok, I'm waiting for others to chime in. But I don't think these have daily cash settlement, then what would be the point of a future expiring at a certain future date? The futures settle at a agreed date. If you want your money sooner you can sell the future before that date. This is my understanding.
Well, believe what you will...
In the futures markets, losers pay winners every day. This means no account losses are carried forward but must be cleared up every day. The dollar difference from the previous day’s settlement price to today’s settlement price determines the profit or loss. If my daily loss results in my net equity falling below exchange established margin levels I will be required to provide additional financial resources to replenish the amount back to required levels or risk liquidation of my position.

Mark-to-market enforces the daily discipline of exchanges profit and loss between open futures positions eliminating any loss or profit carry forwards that might endanger the clearinghouse. Having one final daily settlement for all means every open position is treated equally. By publishing these daily settlement values the exchange provides a great service to commercial and speculative users of the futures markets and the underlying markets they derive their price from.
https://www.cmegroup.com/education/cour ... arket.html
Equity Index Daily & Final Settlement
When trading Equity Index futures, there are two types of settlement: daily and final.

Daily settlement refers to the contract’s settlement price on a daily basis while final settlement represents the final value of the contract at expiration

Futures markets are marked to market every day, a benefit that means every market participant sees the same settlement price at the same time as every other participant.
https://www.cmegroup.com/education/cour ... ement.html

HEDGEFUNDIE
Posts: 2077
Joined: Sun Oct 22, 2017 2:06 pm

Re: Index futures instead of etf to avoid withholding tax

Post by HEDGEFUNDIE » Mon Mar 18, 2019 1:03 am

shcnno wrote:
Mon Mar 18, 2019 12:36 am
Ok, I'm waiting for others to chime in. But I don't think these have daily cash settlement, then what would be the point of a future expiring at a certain future date? The futures settle at a agreed date. If you want your money sooner you can sell the future before that date. This is my understanding.
Your understanding is wrong:

https://www.khanacademy.org/economics-f ... -mechanics

User avatar
BeBH65
Posts: 1345
Joined: Sat Jul 04, 2015 7:28 am

Re: Index futures instead of etf to avoid withholding tax

Post by BeBH65 » Mon Mar 18, 2019 1:13 am

Let me repeat this.
AlohaJoe wrote:
Thu Mar 07, 2019 11:22 pm
shcnno wrote:
Thu Mar 07, 2019 10:26 pm
I don't know much about futures, but is it possible to use futures in place of a index etf to avoid dividends and then US withholding tax for NRA?
Aren't index futures only on the price, not the total return?

It seems like you'd be throwing away $0.70 so you didn't have to pay $0.30?
Indeed there will not be any dividend witholding tax, as there will not be any dividends, as the futures track the net index.

So no 30% to the state and no 70% to you.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

Topic Author
shcnno
Posts: 57
Joined: Tue May 09, 2017 10:56 am

Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Mon Mar 18, 2019 1:20 am

Thanks for the links and videos, very useful!
BeBH65 wrote:
Mon Mar 18, 2019 1:13 am
So no 30% to the state and no 70% to you.
Dividens paid are not included in the e-mini future value?

typical.investor
Posts: 616
Joined: Mon Jun 11, 2018 3:17 am

Re: Index futures instead of etf to avoid withholding tax

Post by typical.investor » Mon Mar 18, 2019 2:38 am

shcnno wrote:
Mon Mar 18, 2019 1:20 am
Thanks for the links and videos, very useful!
BeBH65 wrote:
Mon Mar 18, 2019 1:13 am
So no 30% to the state and no 70% to you.
Dividens paid are not included in the e-mini future value?
Expected dividends are baked into the price.

If futures investors were losing the dividend, it would make sense to go long the S&P and short the future. Who cares if the market goes up or down, just collect the dividends along the way.

If futures prices (including expected dividends) is too high, banks and securities houses will jump in and do just that (or buy futures and short the S&P if futures are prices too low).

Anyway, since futures are only taxed as capital gains, it would seem an NRA would only have to pay tax in their country of residence. While the US has a division for long-term and short-term capital gains, I don't think that would apply and that it would be up to each country of residence to determine how and at what rates the gains are taxed.

long_gamma
Posts: 307
Joined: Mon Sep 14, 2015 4:13 pm

Re: Index futures instead of etf to avoid withholding tax

Post by long_gamma » Mon Mar 18, 2019 7:00 am

shcnno wrote:
Sun Mar 17, 2019 11:01 pm

Thanks for your feedback!
I'll experiement with this in a paper account until I see more how it works.
How could we replicate a worldwide etf like VT with futures? emini+eurostxx+ some emerging market future?
Futures are lumpy and their main purpose is to provide leverage in efficient manner.

There is no easy way to replicate exact VT type of ETF. Either you have to accept some crude approximation of world portfolio if you are using futures (assuming there is some advantage in tax treatment in your country) or just buy VT.

Based on your understanding of futures, you are better off buying VT and be done with it.
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

Topic Author
shcnno
Posts: 57
Joined: Tue May 09, 2017 10:56 am

Re: Index futures instead of etf to avoid withholding tax

Post by shcnno » Mon Mar 18, 2019 7:26 am

I already learned a lot from this thread! So even if I won't go ahead and do this it's very interesting to learn about futures and how it works.
Maybe I could consider it in a few years if I gain more knowledge and paper trading experience.

Thanks for everyone's input!

daze
Posts: 8
Joined: Fri Mar 08, 2019 1:09 am

Re: Index futures instead of etf to avoid withholding tax

Post by daze » Mon Mar 18, 2019 10:35 am

shcnno wrote:
Mon Mar 18, 2019 12:36 am
Ok, I'm waiting for others to chime in. But I don't think these have daily cash settlement, then what would be the point of a future expiring at a certain future date? The futures settle at a agreed date. If you want your money sooner you can sell the future before that date. This is my understanding.
As others already said, you don't understand the mark-to-market daily settlement mechanism of futures.

On the other hand, if you don't like the effect of daily settlement, using options might be an option.
For example, you can short SPY191231P00280000 and long SPY191231C00280000, with enough cash-equivalent set aside.
It's called "synthetic long" strategy.

Options do not have the daily settlement feature, and the gain/loss will not be realized until expired or position closed.
However, the bid/ask spread of options are usually larger than futures.
It's not worthwhile for most targets. ( It may work for SPY, but probably doesn't work for VT. )

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