[Non-US] S&P e-mini futures vs ETFs

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glorat
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[Non-US] S&P e-mini futures vs ETFs

Post by glorat »

What do people think of using S&P e-mini futures contracts to gain US market exposure instead of doing the usual ETF route (e.g. VUSD)?
gougou wrote: Sun Nov 08, 2020 8:24 pm Because you live in Hong Kong so there's no capital gains tax. So there's a better choice than Irish ETFs available through IB. IB offers S&P 500 E-mini futures contracts which are better than Irish-domiciled ETFs in terms of tax treatment. The futures contract is simply a total return swap on the S&P 500 index and there's no tax withholding and no management fees on futures contract. There's also no risk of an estate tax on a futures contract.

The only drawback is that you have to roll over the contract periodically which has a small transaction cost (less than 0.01% typically), but IB can do that automatically for you. Rolling over the contract also realizes all the capital gains, but since HK has no capital gains tax this won't matter to you.
On the face of it, the benefits are many for a buy and hold investor
  • No 15-30% dividend withholding tax for non-US persons
  • Tracks the benchmark index very well (better than ETFs?)
  • High liquidity (low bid/ask spreads)
  • Future roll can apparently be automated by the right broker (IB)
The cons I've found don't seem so bad for many people
  • Takes careful maths to buy the right amount of futures to not accidentally get leveraged. And probably need to put your cash margin in treasuries to balance out the futures funding costs.
  • There are rollover costs (although cheaper than ETFs), and risks of market mismatch during rollover (how bad can this be?)
  • Only available on major indices like the S&P... I don't know if there is one for VT/VTI
  • If the broker goes bust, are you stuck with your broker holding your cash? (As opposed to your custodian safely holding your ETFs and shares)
  • Could get complicated if you are resident in a country that taxes capital gains
It seems synthetic ETFs use equity swaps to implement their US trackers. Why wouldn't they use Futures instead? Why are there no ETFs that promise to do the Futures investment for you? (That could mitigate the last con in my list)

Have I got my list about right?

Any other considerations?

EDIT:
Thanks to all the input below, an outline on how to execute this strategy is on a wiki page at https://www.bogleheads.org/wiki/User:Gl ... ndex_funds awaiting further feedback
Last edited by glorat on Sun Nov 29, 2020 2:53 am, edited 1 time in total.
pin
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by pin »

I saw this and does sound interesting. It is one step further from a simple buy and hold ETF investment.

One thing though, do you still face the USD60k estate duty issue?
Hustlinghustling
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

A minor risk in addition to your list is that the futures positions may have dividends mispriced when you buy/roll them. Futures don't receive the dividends and this is no issue normally since the market adjusts for this in the future pricing based around the estimate of dividends to be paid. However if the actual dividend paid differs from the estimate the future was priced with, a profit/loss impact would arise that wouldn't exist for an ETF simply holding the physical stocks

Complexity of managing the position for me is the most signficant barrier for average buy and holder. And even though it is mini contract, 1 future is still at current prices equivalent to a position around 175K USD. Probably above many average investor's scale to trade on units of that size.
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

Hustlinghustling wrote: Sun Nov 08, 2020 11:37 pm A minor risk in addition to your list is that the futures positions may have dividends mispriced when you buy/roll them. Futures don't receive the dividends and this is no issue normally since the market adjusts for this in the future pricing based around the estimate of dividends to be paid. However if the actual dividend paid differs from the estimate the future was priced with, a profit/loss impact would arise that wouldn't exist for an ETF simply holding the physical stocks

Complexity of managing the position for me is the most signficant barrier for average buy and holder. And even though it is mini contract, 1 future is still at current prices equivalent to a position around 175K USD. Probably above many average investor's scale to trade on units of that size.
You can rollover the contract every quarter after dividend amount is declared and before the ex-dividend date, so the contract difference should be exactly the dividend amount (otherwise there's an arbitrage opportunity).

CME also offers a Micro S&P 500 contract which is just $5 x S&P500 (~$18K). https://www.cmegroup.com/trading/equity ... p-500.html
Hustlinghustling
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

gougou wrote: Mon Nov 09, 2020 3:32 pm
Hustlinghustling wrote: Sun Nov 08, 2020 11:37 pm A minor risk in addition to your list is that the futures positions may have dividends mispriced when you buy/roll them. Futures don't receive the dividends and this is no issue normally since the market adjusts for this in the future pricing based around the estimate of dividends to be paid. However if the actual dividend paid differs from the estimate the future was priced with, a profit/loss impact would arise that wouldn't exist for an ETF simply holding the physical stocks

Complexity of managing the position for me is the most signficant barrier for average buy and holder. And even though it is mini contract, 1 future is still at current prices equivalent to a position around 175K USD. Probably above many average investor's scale to trade on units of that size.
You can rollover the contract every quarter after dividend amount is declared and before the ex-dividend date, so the contract difference should be exactly the dividend amount (otherwise there's an arbitrage opportunity).

CME also offers a Micro S&P 500 contract which is just $5 x S&P500 (~$18K). https://www.cmegroup.com/trading/equity ... p-500.html
I believe you’re misunderstanding how the futures are priced. a futures contract does not react to an ex-date the same way as holding physical stock (or an etf backed by physical stock). While on ex-date, the stock drops in value same as dividend paid there is no impact on futures price before and after ex-date as the future never was supposed to receive the dividend to begin with. its always been priced without it. the key is whether the estimate for the dividend in pricing matches the actual amount declared.

the dividend estimate on futures is continuously priced in and is not something like physical stock you can just pick a point to get around it. even then, it would add more complexity than the average buy and holder can possibly manage to cherrypick those dates. its a minor risk anyway as you are not yourself estimating the dividend but simply taking the market’s pricing of it which should be accurate most of the time, given arbitrage. however it is not assured is my point. many institutional options traders have gotten screwed precisely by estimating a dividend inaccurately for how they price futures/options.

nice to know about the micro contract though, that is certainly much more accessible
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

Hustlinghustling wrote: Mon Nov 09, 2020 7:33 pm
gougou wrote: Mon Nov 09, 2020 3:32 pm
Hustlinghustling wrote: Sun Nov 08, 2020 11:37 pm A minor risk in addition to your list is that the futures positions may have dividends mispriced when you buy/roll them. Futures don't receive the dividends and this is no issue normally since the market adjusts for this in the future pricing based around the estimate of dividends to be paid. However if the actual dividend paid differs from the estimate the future was priced with, a profit/loss impact would arise that wouldn't exist for an ETF simply holding the physical stocks

Complexity of managing the position for me is the most signficant barrier for average buy and holder. And even though it is mini contract, 1 future is still at current prices equivalent to a position around 175K USD. Probably above many average investor's scale to trade on units of that size.
You can rollover the contract every quarter after dividend amount is declared and before the ex-dividend date, so the contract difference should be exactly the dividend amount (otherwise there's an arbitrage opportunity).

CME also offers a Micro S&P 500 contract which is just $5 x S&P500 (~$18K). https://www.cmegroup.com/trading/equity ... p-500.html
I believe you’re misunderstanding how the futures are priced. a futures contract does not react to an ex-date the same way as holding physical stock (or an etf backed by physical stock). While on ex-date, the stock drops in value same as dividend paid there is no impact on futures price before and after ex-date as the future never was supposed to receive the dividend to begin with. its always been priced without it. the key is whether the estimate for the dividend in pricing matches the actual amount declared.

the dividend estimate on futures is continuously priced in and is not something like physical stock you can just pick a point to get around it. even then, it would add more complexity than the average buy and holder can possibly manage to cherrypick those dates. its a minor risk anyway as you are not yourself estimating the dividend but simply taking the market’s pricing of it which should be accurate most of the time, given arbitrage. however it is not assured is my point. many institutional options traders have gotten screwed precisely by estimating a dividend inaccurately for how they price futures/options.

nice to know about the micro contract though, that is certainly much more accessible
OK, I think you are right, I got confused about the E-mini futures contract (which doesn't have an underlying stock) vs a single stock futures on an S&P 500 ETF such as SPY.
Hustlinghustling
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

gougou wrote: Mon Nov 09, 2020 8:56 pm
Hustlinghustling wrote: Mon Nov 09, 2020 7:33 pm
gougou wrote: Mon Nov 09, 2020 3:32 pm
Hustlinghustling wrote: Sun Nov 08, 2020 11:37 pm A minor risk in addition to your list is that the futures positions may have dividends mispriced when you buy/roll them. Futures don't receive the dividends and this is no issue normally since the market adjusts for this in the future pricing based around the estimate of dividends to be paid. However if the actual dividend paid differs from the estimate the future was priced with, a profit/loss impact would arise that wouldn't exist for an ETF simply holding the physical stocks

Complexity of managing the position for me is the most signficant barrier for average buy and holder. And even though it is mini contract, 1 future is still at current prices equivalent to a position around 175K USD. Probably above many average investor's scale to trade on units of that size.
You can rollover the contract every quarter after dividend amount is declared and before the ex-dividend date, so the contract difference should be exactly the dividend amount (otherwise there's an arbitrage opportunity).

CME also offers a Micro S&P 500 contract which is just $5 x S&P500 (~$18K). https://www.cmegroup.com/trading/equity ... p-500.html
I believe you’re misunderstanding how the futures are priced. a futures contract does not react to an ex-date the same way as holding physical stock (or an etf backed by physical stock). While on ex-date, the stock drops in value same as dividend paid there is no impact on futures price before and after ex-date as the future never was supposed to receive the dividend to begin with. its always been priced without it. the key is whether the estimate for the dividend in pricing matches the actual amount declared.

the dividend estimate on futures is continuously priced in and is not something like physical stock you can just pick a point to get around it. even then, it would add more complexity than the average buy and holder can possibly manage to cherrypick those dates. its a minor risk anyway as you are not yourself estimating the dividend but simply taking the market’s pricing of it which should be accurate most of the time, given arbitrage. however it is not assured is my point. many institutional options traders have gotten screwed precisely by estimating a dividend inaccurately for how they price futures/options.

nice to know about the micro contract though, that is certainly much more accessible
OK, I think you are right, I got confused about the E-mini futures contract (which doesn't have an underlying stock) vs a single stock futures on an S&P 500 ETF such as SPY.
any future - whether its on a single stock or on an index - doesn’t pay out dividends. but that’s not a “loss” since the future contract priced it out when buying it to begin with. but in that sense you are never perfectly replicating the index either if its a permanent portfolio position since the dividends will be the difference and the discrepancy is mitigated the lower the dividend yield is.
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

gougou wrote: Mon Nov 09, 2020 3:32 pm You can rollover the contract every quarter after dividend amount is declared and before the ex-dividend date, so the contract difference should be exactly the dividend amount (otherwise there's an arbitrage opportunity).
Above posters already addressed this in accuracy but to think in a different way... the price of the future is based on the expected value of the underlying ETF or individual stock at the time the future expires. At that time, the cash value of that contract is the same as the market value of the stock, which will include the dividend value if after ex-div but before payment.

Hence the price dislocation happens on the day the dividend is announced. The movement price is the difference between the market expected dividend amount and the actual dividend amount, which should be quite small. If the ex-div day is different from announcement day, there is no price movement on ex-div because the dividend is already priced into the market value.

TL;DR for everyone else, this e-mini Future investment strategy will follow the total return benchmark of the underlying with no management fees, which is rather nice so I'm glad to be made aware of this idea. I'm still not going to do it until more people here think it a superior idea though :P
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

I'm requesting to reopen my IBKR paper trading account so I can have a play with this. In the mean time, just looking...

The S&P 500 e-mini can apparently be found as "MES". Under that, there are futures like "MES DEC", "MES MAR", "MES JUN" etc. And there is also "MES ∞ DEC" which is described as "Continuous (Dec)". Is that the one that is simply going to auto-roll?

It seems I can buy 1 contract for ~$3500 which would give exposure of ~$17,500. Not small amounts but I could do that. Presumably to be precisely long, I should put aside $14,000 in treasuries to net out the funding cost.

BUT - what about margin? Do I
1) need a margin account to do this strategy sensibly?
2) do I actually need to hold my $14,000 in a mixture of cash and treasuries to avoid margin calls and forced sale of the wrong thing?
EDIT: Looks like there is no margin issue at all. If I understand right, it seems like investing in a 5x levered product - hence the need to keep 80% of capital in short duration treasuries to de-lever back down to 1xEDIT 2: Actually apparently there is a 10% margin requirement...

Already this is starting to look like not for the faint of heat for a buy and hold and forget investor if one has to maintain capital sensibly... not to mention the risk of not understanding the 5x multiplier. And that's assuming I've understood it myself... Would be grateful if someone could tell me I'm saying the right things.

EDIT 3: From my reading up, it seems like the way to achieve the equivalent of a long $17,500 investment in the S&P 500 would to
- BUY 1 MES micro e-mini S&P 500 future for $3,500
- Keep $1,200 in cash to meet the maintenance margin requirement
- BUY $12,800 in short term treasuries to net out the funding cost (e.g. ticker IB01 - iShares $ Treasury Bond 0-1yr UCITS ETF)


EDIT 4: With gougou's explanation, I think it should actually be
- Go LONG 1 MES e-mini S&P future at price $3,500 to achieve a $17,500 S&P position
- BUY $14,000 in short term treasuries to net out the funding cost (e.g. ticker IB01 - iShares $ Treasury Bond 0-1yr UCITS ETF)
- Cover the ~$1,300 margin requirement by either using your broker margin facility (IBKR allows???) or reducing your treasury holding
Last edited by glorat on Thu Nov 19, 2020 5:02 am, edited 1 time in total.
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

So I opened up a paper trading account and made a trade. For reference, I also bought an equivalent amount in VUSD and SPY. I can track them together
Image

This confirms a few things...
  • At present, 18k USD is the minimum unit of investment.
  • Maintaining cash in the brokerage account as margin is required (I'm not yet sure how much as I did some buy/sells before that may still be using up margin)
I'll hold this paper account for now and see how it behaves over the December futures roll

It seems in theory this is good for buy and hold but I can't find a single guide on the internet that explains it. All you get are opportunities to "trade". Bogle would roll in his grave to hear of using Futures for a buy and hold strategy!
UntoTheBreach
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by UntoTheBreach »

Futures positions don't auto roll at IB.
The continuous contract is just esthetical, for charting etc.
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

UntoTheBreach wrote: Wed Nov 18, 2020 11:34 am Futures positions don't auto roll at IB.
The continuous contract is just esthetical, for charting etc.
Indeed... I just figured this out too
gougou wrote: Sun Nov 08, 2020 8:24 pm The only drawback is that you have to roll over the contract periodically which has a small transaction cost (less than 0.01% typically), but IB can do that automatically for you. Rolling over the contract also realizes all the capital gains, but since HK has no capital gains tax this won't matter to you.
@gougou, are you actually investing in the way you described or at least know someone who has done so?

It seems a manual rollover is needed and that the most efficient way of doing this is booking the right spread trade - which is getting beyond the level of self-education I was looking for in this exercise.
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

glorat wrote: Thu Nov 19, 2020 2:03 am
UntoTheBreach wrote: Wed Nov 18, 2020 11:34 am Futures positions don't auto roll at IB.
The continuous contract is just esthetical, for charting etc.
Indeed... I just figured this out too
gougou wrote: Sun Nov 08, 2020 8:24 pm The only drawback is that you have to roll over the contract periodically which has a small transaction cost (less than 0.01% typically), but IB can do that automatically for you. Rolling over the contract also realizes all the capital gains, but since HK has no capital gains tax this won't matter to you.
@gougou, are you actually investing in the way you described or at least know someone who has done so?

It seems a manual rollover is needed and that the most efficient way of doing this is booking the right spread trade - which is getting beyond the level of self-education I was looking for in this exercise.
Yes I hold MES and MNQ futures and Australian SPI futures and I do futures spread combo trade every 3 months.

I know IB has some settings to enable futures auto roll when they expire, but rolling over once every 3 months isn't much work to me so I haven't bothered to figure out how to enable the auto roll.

And you definitely need to balance the cash position in your account. You can just buy some Treasury bills, those are highly liquid and provide something like 99% margin. I actually buy some ST corporate bonds, which still provide over 95% margin. For example, my account might have $50K worth of MES futures and $100K worth of corporate bonds and a cash balance of $0. The total margin requirement is about 7% on $50K of MES and 5% on $100K bonds, so $8.5K in total, which is pretty safe for a $100K account.
Last edited by gougou on Thu Nov 19, 2020 3:09 am, edited 1 time in total.
Hustlinghustling
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

gougou wrote: Thu Nov 19, 2020 2:52 am I know IB has some settings to enable futures auto roll when they expire, but rolling over once every 3 months isn't much work to me so I haven't bothered to figure out how to enable the auto roll.
I have spoken to IB on this and they said there is no auto-roll option.
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

glorat wrote: Mon Nov 09, 2020 10:41 pm EDIT 3: From my reading up, it seems like the way to achieve the equivalent of a long $17,500 investment in the S&P 500 would to
- BUY 1 MES micro e-mini S&P 500 future for $3,500
- Keep $1,200 in cash to meet the maintenance margin requirement
- BUY $12,800 in short term treasuries to net out the funding cost (e.g. ticker IB01 - iShares $ Treasury Bond 0-1yr UCITS ETF)
You don't "BUY 1 MES micro e-mini S&P 500 future for $3,500". You initiate a long position in MES and you still have $17,500 in cash. You can still buy $17,500 worth of Treasuries at the same time and have a $0 cash balance.

IB looks at your account's NAV, which is $17,500 (because futures contracts are worth nothing). IB looks at your margin requirement, which is around $1320.00 + 1% of Treasuries = $1338. Since $1338 < $17,500 IB won't liquidate your account.

However, you need to be careful about having negative cash balances because IB will charge you interest on that. You also don't want to have a large positive cash balance because IB won't pay you much interest on those.
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

gougou wrote: Thu Nov 19, 2020 3:05 am
glorat wrote: Mon Nov 09, 2020 10:41 pm EDIT 3: From my reading up, it seems like the way to achieve the equivalent of a long $17,500 investment in the S&P 500 would to
- BUY 1 MES micro e-mini S&P 500 future for $3,500
- Keep $1,200 in cash to meet the maintenance margin requirement
- BUY $12,800 in short term treasuries to net out the funding cost (e.g. ticker IB01 - iShares $ Treasury Bond 0-1yr UCITS ETF)
You don't "BUY 1 MES micro e-mini S&P 500 future for $3,500". You initiate a long position in MES and you still have $17,500 in cash. You can still buy $17,500 worth of Treasuries at the same time and have a $0 cash balance.

IB looks at your account's NAV, which is $17,500 (because futures contracts are worth nothing). IB looks at your margin requirement, which is around $1320.00 + 1% of Treasuries = $1338. Since $1338 < $17,500 IB won't liquidate your account.

However, you need to be careful about having negative cash balances because IB will charge you interest on that. You also don't want to have a large positive cash balance because IB won't pay you much interest on those.
Thank you so much both for correcting my understanding and terminology as well as how you are doing this in practice. Perhaps it is worth my continuing my education a bit longer on this!

You're right that taking the long Future position didn't touch my cash. However, I'm slightly mystified why my maintenance margin is current 12.04k. I don't know if it is because I bought then sold (wrong terminology I know) a future before setting things up. Or my long ETF positions in IB01/SPY/VUSD are taking up margin (surely not though...)

For my other margin question which I cross posted to viewtopic.php?f=10&t=330238 , it seems like you're saying you're able to maintain a 0 cash balance position, but you have a broker margin facility and you are using that facility (collaterlised by treasuries) to fund the maintenance margin required by futures. Did I understand right? (Or check my more detailed flavour of that question in the thread)

Finally, would be grateful to understand how to execute the futures spread combo. I couldn't seem to find the right trade in IBKR Mobile. I don't know if I need to use TWS. I guess I've still got a few weeks to learn!

Thanks again for taking the time to explain all this.
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

glorat wrote: Thu Nov 19, 2020 4:59 am
You're right that taking the long Future position didn't touch my cash. However, I'm slightly mystified why my maintenance margin is current 12.04k. I don't know if it is because I bought then sold (wrong terminology I know) a future before setting things up. Or my long ETF positions in IB01/SPY/VUSD are taking up margin (surely not though...)
Your long positions in SPY & VUSD definitely take up margins. It looks like you have $18K worth of SPY, $18K worth of VUSD and 1 MES contract in your account. If we assume stocks have 30% margin requirement, your maintenance margin is $18K * 0.3 + $18K * 0.3 + $1.3K = $12.1K which is pretty close to your 12.04k number. As long as your account's NAV ($36K currently) don't drop below this margin requirement you are safe.
glorat wrote: Thu Nov 19, 2020 4:59 am
For my other margin question which I cross posted to viewtopic.php?f=10&t=330238 , it seems like you're saying you're able to maintain a 0 cash balance position, but you have a broker margin facility and you are using that facility (collaterlised by treasuries) to fund the maintenance margin required by futures. Did I understand right? (Or check my more detailed flavour of that question in the thread)
I'm not able to maintain a 0 cash balance position constantly. Because the futures are cash-settled every day, I'm going to have some positive cash balances and sometimes negative balances. I periodically dump excess cash into some Treasury bills which only have a 1% or 2% margin requirement.
glorat wrote: Thu Nov 19, 2020 4:59 am
Finally, would be grateful to understand how to execute the futures spread combo. I couldn't seem to find the right trade in IBKR Mobile. I don't know if I need to use TWS. I guess I've still got a few weeks to learn!
Image
Click the FutSpreads.
Image
Add the Dec to Mar spread.
Image
Buy this future spread for $8.35 in credit. Both legs are guaranteed to get executed simultaneously so it's a pretty simple trade.
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

gougou wrote: Thu Nov 19, 2020 5:13 pm
Your long positions in SPY & VUSD definitely take up margins. It looks like you have $18K worth of SPY, $18K worth of VUSD and 1 MES contract in your account. If we assume stocks have 30% margin requirement, your maintenance margin is $18K * 0.3 + $18K * 0.3 + $1.3K = $12.1K which is pretty close to your 12.04k number. As long as your account's NAV ($36K currently) don't drop below this margin requirement you are safe.

I'm not able to maintain a 0 cash balance position constantly. Because the futures are cash-settled every day, I'm going to have some positive cash balances and sometimes negative balances. I periodically dump excess cash into some Treasury bills which only have a 1% or 2% margin requirement.
Just wanted to say thanks so much for the very clear explanations. It all makes sense now. I'll keep learning and playing on my paper account.
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glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

So I successfully executed the Futures Spread trade as well... it is still a few weeks before expiry but bid/ask spreads were so tight so I figure why not. The whole thing is still tracking VUSD/SPY very well, as expected.

In the mean time, I've created a wiki page to note down how to do all this
https://www.bogleheads.org/wiki/User:Gl ... ndex_funds

I'd be very grateful for the experts who have already posted here to either help edit/complete the page or simply reply back here with feedback and I can make the edits. And thanks to TedSwippet and LadyGeek for helping me get the initial page properly set up.

Although I still have a number of small questions, the biggest one I have is this: Assuming one is comfortable executing this trading strategy correctly as described (which I am now), what risks can possibly exist for this to underperform VUSD/SPY or other ETF equivalents?
gougou
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gougou »

There's an implied financing rate which you are "charged" when you long equity futures. You need to earn at least the implied financing rate with your unused cash balances to break even.

The implied financing rate is very hard to measure so I tend to assume it's very close to short term Treasury yield, which you can earn if you buy Treasury bills with your unused cash balances. But this might not be true.

A slightly more complicated strategy that avoids the implied financing rate, is to mainly hold SPY until 1 day before the ex-dividend date. You then sell SPY and simultaneously long same amount of e-mini futures. The next day (ex-dividend date), you close your e-mini futures position and buy back SPY. Since both SPY and e-minis are highly liquid, transaction costs should be minimal (< 0.01%). Because you didn't hold SPY on the ex-dividend date, you don't pay any withholding taxes.
jw50
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by jw50 »

Not an expert.
Another option maybe synthetic/swap based etfs listed in non us countries eg: Invesco MSCI USA UCITS ETF

Maybe more knowledgeable bogleheads can comment.
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glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

gougou wrote: Sun Nov 29, 2020 3:45 am The implied financing rate is very hard to measure so I tend to assume it's very close to short term Treasury yield, which you can earn if you buy Treasury bills with your unused cash balances. But this might not be true.
The theoretical rate as used by Wall Street institutions is the "risk free rate of interest" as measured by the USD yield curve. The yield curve is based on risk free fixed income instruments, which are indeed treasuries. However, treasuries aren't in practice quite that short term so the Wall Street institutions would based on the interest rate futures market - so one can look there to see the exact risk free financing rate. Usefully, interest rate futures also expire on the same 3 months as the MES futures, albeit on the 3rd Wednesday of month (rather than the 3rd Friday for MES).

In practice, can people really get financing at the risk free rate? No, because those institutions themselves are not risk free. There would be some % above the treasury risk free rate. So the answer would be to add some number along the following spectrum
  • 0% - simply risk free
  • 0.05% - The TER of the cheapest S&P 500 ETF. (The TER being the proxy of the cost to acquire and hold the index
  • 0.3% - The margin loan rate spread that IB is offering
I also can't say what the answer is but based on the above, my best theoretical guess is Treasury/IRF/Risk-Free Rate + 0.07% (where 0.07% is the iShares S&P TER). If the market was more expensive than that, the Blackrock prop desk could probably issue itself some S&P shares then sell the futures.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

jw50 wrote: Sun Nov 29, 2020 5:04 am Not an expert.
Another option maybe synthetic/swap based etfs listed in non us countries eg: Invesco MSCI USA UCITS ETF

Maybe more knowledgeable bogleheads can comment.
Yes, for anyone who wants the benefits from this thread around avoiding US witholding taxes but want none of this trading nonsense, this is the way to go.

The main downsides to consider are
1) The TER
2) Equity swaps are over the counter (OTC) products that are subject to counterparty risk issues, as well as...
3) The counterparty one day deciding that they don't want to continue swapping anymore, forcing the liquidation of the ETF.

The Futures market minimises counterparty risk through margins being held. There is the tiny risk that the CBE will stop offering e-mini micro futures but I assume that is unlikely given the amount of volume (and thus profit) going through the product. And unilke an OTC product, there are an unlimited number of market makers and prop traders who will ensure good pricing and liquidity in those futures.

At this point, I repeat my disclaimer that this whole thread is still largely for educational purposes only. I personally have no real money in this (yet) and I'm pretty sure that for 99% of the population, you're better off simply buying physical ETFs and eating the taxes and costs.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

pin wrote: Sun Nov 08, 2020 11:11 pm One thing though, do you still face the USD60k estate duty issue?
Just wondering if anyone get an answer on this point?
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by alex_686 »

glorat wrote: Sun Nov 29, 2020 9:38 am
The main downsides to consider are
1) The TER
2) Equity swaps are over the counter (OTC) products that are subject to counterparty risk issues, as well as...
3) The counterparty one day deciding that they don't want to continue swapping anymore, forcing the liquidation of the ETF.
The market has been overhauled a lit. While the swaps are otc many are centrally cleared. The standard is to post collateral daily, so exposure is minimal.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

Hustlinghustling wrote: Thu Dec 03, 2020 10:14 pm
pin wrote: Sun Nov 08, 2020 11:11 pm One thing though, do you still face the USD60k estate duty issue?
Just wondering if anyone get an answer on this point?
Well, if you die, by the time probate happens, the future will probably have expired and your S&P profit (not position) will be liquidated into cash, held at the broker. That could be a problem but likely less than $60k. It's hard to make $60k from the S&P within 3 months unless you really have that much and the market rallies while you die. However, since the bulk of your long position is 100% treasuries, preferably in a UCITS ETF like IB01 as suggested above, then this is Ireland domicile so exempt from the estate tax.

In short, it seems in theory there should be no problem for 99% of people in 99% of the market situations.

The above is all theoretical and while it seems correct to me, I doubt we'll find anyone with practical experience to validate the above!
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

alex_686 wrote: Thu Dec 03, 2020 10:21 pm
glorat wrote: Sun Nov 29, 2020 9:38 am 2) Equity swaps are over the counter (OTC) products that are subject to counterparty risk issues, as well as...
The market has been overhauled a lit. While the swaps are otc many are centrally cleared. The standard is to post collateral daily, so exposure is minimal.
Good point. I would fully expect even an OTC contract like this to be properly collateralised and/or with margin to prevent large nominal losses if a counterparty goes bust. I think this therefore should get bucketed in the list of risks towards the ETF getting liquidated at market if 1) the counterparty goes bust 2) tax laws change 3) the equity swap providers simply wishes to leave the market
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by TedSwippet »

glorat wrote: Fri Dec 04, 2020 1:39 am
Hustlinghustling wrote: Thu Dec 03, 2020 10:14 pm
pin wrote: Sun Nov 08, 2020 11:11 pm One thing though, do you still face the USD60k estate duty issue?
Just wondering if anyone get an answer on this point?
Well, if you die, by the time probate happens, the future will probably have expired and your S&P profit (not position) will be liquidated into cash, held at the broker. That could be a problem but likely less than $60k. ...
The thing is, though, the US estate tax applies to what you hold on date of death, not date of probate. And what you hold on that date will be the futures, not the liquidated cash.

Assuming that these futures are not 'US situs' as far as US estate tax is concerned -- and they had better not be, otherwise the whole strategy is flawed! -- whether or not liquidation on expiry after death raises more than $60k shouldn't really matter, I don't think.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

TedSwippet wrote: Fri Dec 04, 2020 3:40 am The thing is, though, the US estate tax applies to what you hold on date of death, not date of probate. And what you hold on that date will be the futures, not the liquidated cash.

Assuming that these futures are not 'US situs' as far as US estate tax is concerned -- and they had better not be, otherwise the whole strategy is flawed! -- whether or not liquidation on expiry after death raises more than $60k shouldn't really matter, I don't think.
Good catch on the date of death issue.

I still hypothesise there is no big issue here because
- a future is only a contract, a promise to buy at a price . The value of this asset, if the tax man even thinks it is, should be still only its liquidation value
- no cash was traded to enter the long position
- the only cash trading was done except to buy the UCITS treasuries that are exempt
- no custodian is holding assets for me in the US - just my maintenance margin
If that is all correct, then again, the max futures value exposure for the is tax man is 3M of S&P profit

In general, I wonder how the heck this us estate tax thing can ever work for people with margin trading accounts. The general answer there would probably answer this.

My guess is that estate tax would apply to assets held in US custodian accounts. This strategy holds fairly small amounts in such.

The only way to know for sure is someone to try it and die and then tell us?!!
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by AlohaJoe »

glorat wrote: Fri Dec 04, 2020 4:47 am
In general, I wonder how the heck this us estate tax thing can ever work for people with margin trading accounts. The general answer there would probably answer this.
Keep in mind that the real world answer is that nobody pays attention to US estate laws and the estate just transfers money out without notifying the US that anybody died.

In 2014 the IRS reports that only 182 people filed a non resident estate tax form.

https://www.irs.gov/statistics/soi-tax- ... ax-returns
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

AlohaJoe wrote: Fri Dec 04, 2020 6:41 am
glorat wrote: Fri Dec 04, 2020 4:47 am
In general, I wonder how the heck this us estate tax thing can ever work for people with margin trading accounts. The general answer there would probably answer this.
Keep in mind that the real world answer is that nobody pays attention to US estate laws and the estate just transfers money out without notifying the US that anybody died.

In 2014 the IRS reports that only 182 people filed a non resident estate tax form.

https://www.irs.gov/statistics/soi-tax- ... ax-returns
Interesting. Had no idea it was that largely ignored.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by hi_there »

"The futures contract is simply a total return swap on the S&P 500 index "

This has little bearing on the argument, but I just wanted to point out that this is mechanically incorrect, since futures settle on the price of SPX ex-dividend. So, in theory, futures would be economically exposed to sudden changes in dividend payout, but TRS would not.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

hi_there wrote: Fri Dec 04, 2020 7:33 pm "The futures contract is simply a total return swap on the S&P 500 index "

This has little bearing on the argument, but I just wanted to point out that this is mechanically incorrect, since futures settle on the price of SPX ex-dividend. So, in theory, futures would be economically exposed to sudden changes in dividend payout, but TRS would not.
Agree, and what I was mentioning previously too. TRS would not bear any risk of a potential gap between the expected dividend and the actual div paid. But for an index as widely traded and as liquid as the SP500, the risk on this should be minimal.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

hi_there wrote: Fri Dec 04, 2020 7:33 pm "The futures contract is simply a total return swap on the S&P 500 index "

This has little bearing on the argument, but I just wanted to point out that this is mechanically incorrect, since futures settle on the price of SPX ex-dividend. So, in theory, futures would be economically exposed to sudden changes in dividend payout, but TRS would not.
But this is a critical point. If the futures don't give the total return, then the entire strategy is bust and I can close this thread.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by alex_686 »

glorat wrote: Fri Dec 04, 2020 10:43 pm But this is a critical point. If the futures don't give the total return, then the entire strategy is bust and I can close this thread.
Why?

Dividends estimates are highly accurate and can be modeled and replicated with futures. I suspect that the tracking error would be minor.

However if thus is important there are futures that track just the dividends.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

alex_686 wrote: Fri Dec 04, 2020 10:57 pm
glorat wrote: Fri Dec 04, 2020 10:43 pm But this is a critical point. If the futures don't give the total return, then the entire strategy is bust and I can close this thread.
Why?

Dividends estimates are highly accurate and can be modeled and replicated with futures. I suspect that the tracking error would be minor.

However if thus is important there are futures that track just the dividends.
I mean it is critical that futures are tracking the estimated total return in terms of future index price + future expected dividends.

If that is the case, then I agree that the tracking difference when dividends get announced is minimal because we can trust that the market is making sensible predictions.

But if MES futures are only giving S&P capital value increases excluding dividends then it is like investing in a VUSD ETF that never pays dividends.

The question is... which is it?
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

glorat wrote: Fri Dec 04, 2020 11:02 pm
alex_686 wrote: Fri Dec 04, 2020 10:57 pm
glorat wrote: Fri Dec 04, 2020 10:43 pm But this is a critical point. If the futures don't give the total return, then the entire strategy is bust and I can close this thread.
Why?

Dividends estimates are highly accurate and can be modeled and replicated with futures. I suspect that the tracking error would be minor.

However if thus is important there are futures that track just the dividends.
I mean it is critical that futures are tracking the estimated total return in terms of future index price + future expected dividends.

If that is the case, then I agree that the tracking difference when dividends get announced is minimal because we can trust that the market is making sensible predictions.

But if MES futures are only giving S&P capital value increases excluding dividends then it is like investing in a VUSD ETF that never pays dividends.

The question is... which is it?
Futures do not give total return and as I had mentioned before, are always without the dividend. That's why the div estimate is important and for something as highly tracked as the SP500, the market estimates will be more than sufficient for the average investor. Its precision is more important say, for those market making on options on the SP500 where the smallest error could throw everything off in pricing.

As the futures price has already taken out the expected dividend, it's not a loss of income since you never paid for it to begin with.

It is why futures prices for further dated months often are lower than nearer ones. That has nothing to do with an expected market movement downwards, but expectation of dividends to be paid by then which the futures contract buyer does not receive and so is subtracted from the spot price (with interest rate considerations mixed in of course)
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by hi_there »

glorat wrote: Fri Dec 04, 2020 10:43 pm
hi_there wrote: Fri Dec 04, 2020 7:33 pm "The futures contract is simply a total return swap on the S&P 500 index "

This has little bearing on the argument, but I just wanted to point out that this is mechanically incorrect, since futures settle on the price of SPX ex-dividend. So, in theory, futures would be economically exposed to sudden changes in dividend payout, but TRS would not.
But this is a critical point. If the futures don't give the total return, then the entire strategy is bust and I can close this thread.
Futures do give total return, in a way, since their price is already lower to reflect future dividend payments. If all interest rates are zero and a $100 stock will pay a $1 dividend, the forward price is $99. The fact that you buy the forward for a lower price means you own the dividend, synthetically.

Predicted dividends do not usually change materially within the 0-3 month time span in which you would trade or roll the front month future contract. This is because companies tend to stick to publicly stated dividend payout schedules, in which investors prefer stability and predictability. Furthermore, an independent change in the dividend of one stock in SPX is unlikely to be material to the index forward price, especially since the the index is top heavy in stocks like AAPL or AMZN that have low dividends to begin with. Maybe it would be a bigger effect for DJI or another index with fewer stocks, but again, unlikely to matter in the long run.

But anyway, just because what I stated is technically true, it's unlikely that any resulting tracking error will be economically material. Hence, I said it probably doesn't matter to the overall argument. The one situation in which I've seen mass simultaneous dividend changes in large cap stocks is during severe market distress, i.e. 2020 pandemic where many companies suspended short term dividend payouts to preserve capital. However, this worked in favor of long futures positions. I'm assuming there isn't a likely opposite scenario in some sort of extraordinarily positive market.

Other than operational or tax considerations, the most material economic difference between futures and ETFs is the implicit funding in futures contracts, which assumes that you are effectively borrowing at some fair market interest rate. The extent to which this market funding rate differs from your own cost of capital is a material consideration, if you're interest in doing the "careful maths".
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

Hustlinghustling wrote: Fri Dec 04, 2020 11:26 pm As the futures price has already taken out the expected dividend, it's not a loss of income since you never paid for it to begin with.
So my understanding is that the Future contract itself doesn't return the dividend but the discounted price of the future at the time of purchase compensates for the lack of dividends? Is that right? (It would be helpful for someone to explain from first principles using no-arbitrage reasoning...)

If so, then the strategy as a whole would indeed return expected total S&P 500 returns including dividends. It is just that there will be tracking error if actual announced dividends differ from market expectations at the time of your purchase.

Correct?
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by alex_686 »

glorat wrote: Fri Dec 04, 2020 11:02 pm I mean it is critical that futures are tracking the estimated total return in terms of future index price + future expected dividends.
First, it is future actual dividends, not estimate.

Second, why is it important?

I work with both. There are strong advantages for futures that trade without dividends. It means that you can replicate the portfolio basket with the actual underlying instruments. This means there are actual arbitrage trades. This is necessary it actual make and run the market.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

glorat wrote: Fri Dec 04, 2020 11:53 pm
Hustlinghustling wrote: Fri Dec 04, 2020 11:26 pm As the futures price has already taken out the expected dividend, it's not a loss of income since you never paid for it to begin with.
So my understanding is that the Future contract itself doesn't return the dividend but the discounted price of the future at the time of purchase compensates for the lack of dividends? Is that right? (It would be helpful for someone to explain from first principles using no-arbitrage reasoning...)

If so, then the strategy as a whole would indeed return expected total S&P 500 returns including dividends. It is just that there will be tracking error if actual announced dividends differ from market expectations at the time of your purchase.

Correct?
Assuming the slippage between expected dividend and actual div are negligible, it should give you the same absolute dollar return per share/lot. but the proportional % return will not be the same due to different entry prices resulting from the dividend being taken out (and financing differences)
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

hi_there wrote: Fri Dec 04, 2020 11:50 pm Futures do give total return, in a way, since their price is already lower to reflect future dividend payments. If all interest rates are zero and a $100 stock will pay a $1 dividend, the forward price is $99. The fact that you buy the forward for a lower price means you own the dividend, synthetically.

Predicted dividends do not usually change materially within the 0-3 month time span in which you would trade or roll the front month future contract. This is because companies tend to stick to publicly stated dividend payout schedules, in which investors prefer stability and predictability. Furthermore, an independent change in the dividend of one stock in SPX is unlikely to be material to the index forward price, especially since the the index is top heavy in stocks like AAPL or AMZN that have low dividends to begin with. Maybe it would be a bigger effect for DJI or another index with fewer stocks, but again, unlikely to matter in the long run.

But anyway, just because what I stated is technically true, it's unlikely that any resulting tracking error will be economically material. Hence, I said it probably doesn't matter to the overall argument. The one situation in which I've seen mass simultaneous dividend changes in large cap stocks is during severe market distress, i.e. 2020 pandemic where many companies suspended short term dividend payouts to preserve capital. However, this worked in favor of long futures positions. I'm assuming there isn't a likely opposite scenario in some sort of extraordinarily positive market.

Other than operational or tax considerations, the most material economic difference between futures and ETFs is the implicit funding in futures contracts, which assumes that you are effectively borrowing at some fair market interest rate. The extent to which this market funding rate differs from your own cost of capital is a material consideration, if you're interest in doing the "careful maths".
Many thanks for this very thorough and clear explanation. I think I totally get it now and even have the back of the envelope no-arbitrage proof to go with it.
Hustlinghustling wrote: Sun Dec 06, 2020 2:10 am
glorat wrote: Fri Dec 04, 2020 11:53 pm
Hustlinghustling wrote: Fri Dec 04, 2020 11:26 pm As the futures price has already taken out the expected dividend, it's not a loss of income since you never paid for it to begin with.
So my understanding is that the Future contract itself doesn't return the dividend but the discounted price of the future at the time of purchase compensates for the lack of dividends? Is that right? (It would be helpful for someone to explain from first principles using no-arbitrage reasoning...)

If so, then the strategy as a whole would indeed return expected total S&P 500 returns including dividends. It is just that there will be tracking error if actual announced dividends differ from market expectations at the time of your purchase.

Correct?
Assuming the slippage between expected dividend and actual div are negligible, it should give you the same absolute dollar return per share/lot. but the proportional % return will not be the same due to different entry prices resulting from the dividend being taken out (and financing differences)
Thanks for this too. I think this is making sense too now.

To try to translate in simplified terms... since the Futures price tracks the S&P index it is clear that when one finally cashes out, you're going to gain only the capital appreciation value of the S&P 500 during that time period excluding any dividends (nor funding costs).

However, during the time you are holding this strategy, you also receive the following income
- Interest from your treasury holding
- Income every 3 months when you roll the futures.

My back of the envelope no-arbitrage calculation tells me that if we assume all funding costs/benefits are based on the risk free rate of interest and there are no other management costs, then the sum of the above two income (discounted to Present Value) should equal
- The market expected dividend income you would have received had you instead just held the S&P 500 ETF instead

Yes/no on this statement?

If not sure, I might spend some time to write out the pricing theory, although I rather hope it has been written up elsewhere.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by he400 »

I wonder if anyone has done this for US-based investors?

Are the long term capital gains tax trade-offs (buying and holding ETFs) worth the leverage that you could use to go long S&P / NASDAQ (using margins for futures).
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by TedSwippet »

Welcome.
he400 wrote: Mon Jan 11, 2021 4:32 pm I wonder if anyone has done this for US-based investors?
The aim of this is for US nonresident aliens to sidestep both the US's unrecoverable 30% dividend tax withholding (lower if treaty) and the risk of confiscatory US estate tax, 26-40% of holdings above just $60,000. It works best where you live in a country without a capital gains tax.

Neither of these is a problem for most US-based investors. For them, there is no dividend tax withholding, and estate taxes do not begin until assets of over $11mm. And the US has a capital gains tax.
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by Hustlinghustling »

came across this informative piece on roll yield which reminded me of this thread
https://www.cmegroup.com/education/file ... -yield.pdf
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

Hustlinghustling wrote: Tue Feb 09, 2021 3:38 am came across this informative piece on roll yield which reminded me of this thread
https://www.cmegroup.com/education/file ... -yield.pdf
Thanks for sharing! This is very informative. Confirms what I now finally understand
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by gokuisthebest »

Hi, Im also in a similar position and would like to learn more about this strategy. I'm new to margin/futures and playing in the paper account. I would like to ask few questions:
gougou wrote: Thu Nov 19, 2020 2:52 am And you definitely need to balance the cash position in your account. You can just buy some Treasury bills, those are highly liquid and provide something like 99% margin. I actually buy some ST corporate bonds, which still provide over 95% margin. For example, my account might have $50K worth of MES futures and $100K worth of corporate bonds and a cash balance of $0. The total margin requirement is about 7% on $50K of MES and 5% on $100K bonds, so $8.5K in total, which is pretty safe for a $100K account.
1. What does "bonds provide over 95% margin" mean?
2. How do you find that margin requirement is 7% on $50K of MES and 5% on $100K bonds?
gougou wrote: Thu Nov 19, 2020 5:13 pm Your long positions in SPY & VUSD definitely take up margins. It looks like you have $18K worth of SPY, $18K worth of VUSD and 1 MES contract in your account. If we assume stocks have 30% margin requirement, your maintenance margin is $18K * 0.3 + $18K * 0.3 + $1.3K = $12.1K which is pretty close to your 12.04k number. As long as your account's NAV ($36K currently) don't drop below this margin requirement you are safe.
Why does buying etfs like SPY/VUSD etc. use margin?
I bought 1 MES at 19.5k and 50 SPY at 19.5k and the maintenance margin is 3.8k, how is it calculated here?
Image

In this IBKR link, they mention several prices for MES such as INTRADAY INITIAL, INTRADAY MAINTENANCE, OVERNIGHT INITIAL, OVERNIGHT MAINTENANCE. Are these prices fixed or will they be updated everyday or so? Should we take the max value of these 4 to determine the margin on 1 MES contract?

In the wiki example with 100k, can you please explain how to calculate the leverage(by using todays SnP index ~3,913) 100k/3,913=5 MES contracts and 100k treasury?
From my understanding of leverage, since MES contracts worth(rounded to integer) ≃ treasury bonds worth which means the account is basically split 1/2, 1/2 between futures and bonds so leverage would be 0.5*5 + 0.5*0 = 2.5x. MES provides 5x and bonds provide 0x leverage.
To bring leverage to 1x, we need to hold 20% in MES and 100% in bonds which is 0.2*5 + 0.5 *0 = 1x. Is that correct?
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

With the disclaimer that I'm still learning and have no real money in this strategy so can be wrong about things
gokuisthebest wrote: Thu Feb 18, 2021 5:21 pm 1. What does "bonds provide over 95% margin" mean?
2. How do you find that margin requirement is 7% on $50K of MES and 5% on $100K bonds?
1. It means the margin requirement is 5%.
2. The easy answer to enter the trade at IBKR and just before you submit, you can see the margin changes. IBKR semi-control the margin requirement, so this is the safe answer but they are based on whatever the exchanges/clearers demand of them. So for MES, you can see from the CME website that the margin requirement is 7%.
gokuisthebest wrote: Thu Feb 18, 2021 5:21 pm Why does buying etfs like SPY/VUSD etc. use margin?
I bought 1 MES at 19.5k and 50 SPY at 19.5k and the maintenance margin is 3.8k, how is it calculated here?
On a margin account, taking any long position margin (instead of cash). Unlike a cash account, you are no longer buying/selling for cash but taking long/short positions, that require margin. That's the head-spinner I got when going from a cash account to a margin account.

So I guess the MES takes 1.4k margin and the SPY took 2.4k
gokuisthebest wrote: Thu Feb 18, 2021 5:21 pm
In this IBKR, they mention several prices for MES such as INTRADAY INITIAL, INTRADAY MAINTENANCE, OVERNIGHT INITIAL, OVERNIGHT MAINTENANCE. Are these prices fixed or will they be updated everyday or so? Should we take the max value of these 4 to determine the margin on 1 MES contract?
Those are not prices, they are margin requirements. I'll make two comments
1) In this strategy, the margin requirements don't matter because our final net synthetic long position is 100% collaterlised so it is nearly impossible to run out of margin or get margin called
2) Brokers can change margin requirements as they feel like. E.g. Trading GME stock may go from 10% (or whatever) margin to 100% margin overnight. And if you have a overly exposed leveraged position, you could get margin called just like that and be toast. Margin+leverage is danger danger and I'll keep any further discussion of that topic outside the scope of this thread!
gokuisthebest wrote: Thu Feb 18, 2021 5:21 pm In the wiki example with 100k, can you please explain how to calculate the leverage(by using todays SnP index ~3,913) 100k/3,913=5 MES contracts and 100k treasury?
From my understanding of leverage, since MES contracts worth(rounded to integer) ≃ treasury bonds worth which means the account is basically split 1/2, 1/2 between futures and bonds so leverage would be 0.5*5 + 0.5*0 = 2.5x. MES provides 5x and bonds provide 0x leverage.
To bring leverage to 1x, we need to hold 20% in MES and 100% in bonds which is 0.2*5 + 0.5 *0 = 1x. Is that correct?
Not correct.

MES contracts do not provide 5x leverage. Their exposure is 5x their face value in terms of the S&P index. Bonds don't provide 0x leverage. You've misunderstood the meaning of leverage.

My simple explanation of leverage is this. You've got 100k USD of cash. If you use that to get 100k worth of S&P 500 exposure, that's 1x leverage because your long position (100k) divided by your assets going in (100k) is still 1x. If your broker lets you use that 100k USD to 1400k USD position in the S&P by buying MES futures with a 7% margin requirement (which is 100k margin requirement) then you have achieved 14x leverage.

In this strategy example, you've put in 100k and got back
- 100k S&P exposure from the MES
- Negative 100k libor/treasury exposure from the MES funding cost
- Positive 100k treasury exposure from the bonds
Assuming the latter two cancel out (which is an assumption of this strategy) then you're left with 100k S&P exposure from 100k cash. 1x leverage
gokuisthebest
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Joined: Tue Sep 29, 2020 8:59 am

Re: [Non-US] S&P e-mini futures vs ETFs

Post by gokuisthebest »

Is there a way in IBKR to see margin for each of the financial instruments we already entered? I understand we can check them before submitting but what about the already submitted ones.
glorat wrote: Thu Feb 18, 2021 8:25 pm On a margin account, taking any long position margin (instead of cash). Unlike a cash account, you are no longer buying/selling for cash but taking long/short positions, that require margin. That's the head-spinner I got when going from a cash account to a margin account.

So I guess the MES takes 1.4k margin and the SPY took 2.4k
So unlike cash account, in the margin account we dont actually buy anything but we enter long/short positions? what about stocks like AAPL etc. do they also use margin? It seems strange because we have the cash but it somehow uses margin, not sure if im missing something.


Image
Today, the margin in my account is 3.4k instead of 3.8k without any new trades. Does margin keep changing?


Currently, I have 1 long MES and 50 long SPY. And i tried to check the new margin maintenance for following:
1 new MES: Image

50 new SPY: Image

Why the current and change maintenance margin not the same in above pictures? yesterday's MES position has more maintenance margin than today's and yesterdays 50 SPY has more maintenance than todays 50 SPY(if I bought) even though the price hasnt moved much from yesterday as you can see from the daily P&L in the pic attached.
glorat wrote: Thu Feb 18, 2021 8:25 pm Those are not prices, they are margin requirements. I'll make two comments
1) In this strategy, the margin requirements don't matter because our final net synthetic long position is 100% collaterlised so it is nearly impossible to run out of margin or get margin called
2) Brokers can change margin requirements as they feel like. E.g. Trading GME stock may go from 10% (or whatever) margin to 100% margin overnight. And if you have a overly exposed leveraged position, you could get margin called just like that and be toast. Margin+leverage is danger danger and I'll keep any further discussion of that topic outside the scope of this thread!
I understand margin doesnt matter much in this strategy but I'm trying to learn and also possibly use this strategy with higher leverage(replace UPRO in HFEA). I dont think the highly traded futures especially for SnP500 can have that margin problem where they increase to 100%. Do u know if it has ever happened before?
glorat wrote: Thu Feb 18, 2021 8:25 pm Not correct.

MES contracts do not provide 5x leverage. Their exposure is 5x their face value in terms of the S&P index. Bonds don't provide 0x leverage. You've misunderstood the meaning of leverage.

My simple explanation of leverage is this. You've got 100k USD of cash. If you use that to get 100k worth of S&P 500 exposure, that's 1x leverage because your long position (100k) divided by your assets going in (100k) is still 1x. If your broker lets you use that 100k USD to 1400k USD position in the S&P by buying MES futures with a 7% margin requirement (which is 100k margin requirement) then you have achieved 14x leverage.

In this strategy example, you've put in 100k and got back
- 100k S&P exposure from the MES
- Negative 100k libor/treasury exposure from the MES funding cost
- Positive 100k treasury exposure from the bonds
Assuming the latter two cancel out (which is an assumption of this strategy) then you're left with 100k S&P exposure from 100k cash. 1x leverage
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Sorry, I feel my calculations are correct but I was probably not clear what I meant.
MES definitely can be considered a 5x leverage product because 1 MES contract worth SnP500(3900USD) gives exposure to 19500 USD which is 5x.
"To bring leverage to 1x, we need to hold 20% in MES and 100% in bonds which is 0.2*5 + 0.5 *0 = 1x". here 0.2 MES part gives exposure to 100k just like what you said so we are both on the same page.

If I have 'x' cash and need 'l' leverage, n=l*x/(5*S&P 500 price) will be the no of MES contract I'll go long with. And use entire 'x' cash I have to buy bonds. We plug l=1 and x=100k, we get n=5 MES contracts == 3900*5 == 19500 == 0.2*100k.
I feel bonds +ve exposure is very small and can be ignored.

What do you mean by "Negative 100k libor/treasury exposure from the MES funding cost"?
Topic Author
glorat
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Re: [Non-US] S&P e-mini futures vs ETFs

Post by glorat »

gokuisthebest wrote: Fri Feb 19, 2021 2:42 pm So unlike cash account, in the margin account we dont actually buy anything but we enter long/short positions? what about stocks like AAPL etc. do they also use margin? It seems strange because we have the cash but it somehow uses margin, not sure if im missing something.
I could be entirely wrong on the shares bit. But one thing I likely have mislead you on... with shares, you do "buy" them at the end of the day. Cash goes to the seller. I suppose it is a matter of semantics whether your cash goes to the seller... or your cash goes to your broker, who adds it to your margin account value (since it is cash collateral), and then you borrow against your cash, to give cash to the seller so you get the shares. As you can see from your screenshots, IB seems to sort of explain it in the latter way. It is confusing

With Futures, it seems you don't "buy" them. Noone is selling one to you. You enter a contract with them and end up with a long position. There is no upfront cash changing hands.
gokuisthebest wrote: Fri Feb 19, 2021 2:42 pm Does margin keep changing?
I know that in theory brokers and clearers can change margin requirements. In practice I don't know how that works. (GME was an interesting case). But maybe what you are seeing is that the % of the NAV changed, which affects the margin. I.e. it is just market movements.
gokuisthebest wrote: Fri Feb 19, 2021 2:42 pm I dont think the highly traded futures especially for SnP500 can have that margin problem where they increase to 100%. Do u know if it has ever happened before?
I'd expect it to stay at whatever the CME group says at 7%. IB itself may have power to change it. They certainly have the power to change what % of your NAV you can borrow against to get more leveraged margin.
gokuisthebest wrote: Fri Feb 19, 2021 2:42 pm MES definitely can be considered a 5x leverage product because 1 MES contract worth SnP500(3900USD) gives exposure to 19500 USD which is 5x.
What you say here would be true if you are using 3900 USD of cash to buy 19500 USD of S&P exposure. However, you don't buy a future, no cash changes hands.

If the maintenance margin is 7%, I'm guessing that the max available leverage is more like 14x if you use up your 100k margin on buying MES with an exposure of 1400k S&P. Obviously don't do this because you'll likely get margin called rather soon... but it is a fun paper account thing to experiment with. (I wonder if you can get 21x if IB lets you borrow against your MES position to get more margin to buy even more MES???? I hope not)

gokuisthebest wrote: Fri Feb 19, 2021 2:42 pm What do you mean by "Negative 100k libor/treasury exposure from the MES funding cost"?
Total return of rolling MES investment is S&P 500 total return, minus the funding costs of the other side to get that exposure. That funding cost will be some institutional lending rate, which these days is somewhere between the USD LIBOR rate (bank funding rate) or USD OIS rate (fed funding rate, for institutions that can fund from the fed)
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