DonIce wrote: ↑Tue Sep 24, 2019 8:08 pmThink about for example 5 year futures vs 10 year futures. To get roughly the same behavior with 5 year futures, you would need to hold 2 times the notional value, and so trade 2x as many contracts, and so have 2x the costs. The two positions should behave almost identically (2 5 year contracts vs 1 10 year contract). Which has the higher ER? If you think about it in terms of notional, they have the same ER. But if you think about it based on the cost you pay for the effect that you get, 2 5 years has a 2x higher ER. At least, that's how I've been thinking about it. Am I making a mistake somewhere?rascott wrote: ↑Tue Sep 24, 2019 6:15 pmDonIce wrote: ↑Mon Sep 23, 2019 10:44 pmThe notional value isn't really important, just the potential returns or potential volatility, right? Over the course of a year the 2 year futures contract usually moves around 1% or so, so that's about $2000. And $50 is 2.5% out of that $2k of movement.RandomWord wrote: ↑Mon Sep 23, 2019 10:35 pmBut I also think it's important to keep in mind the scale. The leverage on these things is so large that it's easy to lose track of the big picture. I don't think $50 per year or whatever on a $200,000 notional value is worth worrying about it. Now, if there's some reason why eurodollars should deliver a larger return than treasury futures, that could be worth way more than $50 a year. But it would be strange if the market allowed such an inefficiency to persist, when these are both so heavily traded.
This doesn't seem right to me.... that's like saying the expense ratio of a fund is based upon its volatility/ expected return. Every bond fund in existence would have probably worse numbers than this.
The correct comparison is trading costs to notional value.... that's the effective ER of this strategy.
Also, how are ERs defined for leveraged funds? I think its based on the value invested, not the value controlled by the leverage? For example, if you put $1000 into a 3x leveraged fund with an expense ratio of 1%, that's because its expenses are $10 on the $1000 that you put in, not $30 on the $3000 that your investment nominally controls.
No that is correct.... and that's what I said.... the ER would be the total trading cost per year/ notional value. You could figure that out pretty easy. So yeah, it would have 2x the cost.... bit 2x of nearly 0 is still pretty close to nearly zero.
An ultra short term bond fund doesn't have lower ERs than a long duration fund... actually likely has higher due to the constant work. But would you say don't invest in say
a Vanguard ST Investor Class treasury fund, it's too expensive compared to the expected return with a 0.20% ER. The hypothetical $200k investment costs you $400 a year in fees. Holding/ rolling one 2 year futures contract would be exponentially less than that. And holding a treasury futures contract with all the remaining cash in t- bills provides basically the identical return as just holding the treasury bond itself.
The Admiral class at 0.07% would cost you $140... still close to triple the cost of the futures contract, annually.
Put more simply, the trading fees are basically irrelevant.