Futures vs. ETFs – scenarios

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Futures vs. ETFs – scenarios 2017-03-03T15:26:54+00:00
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  • Philip
    Member
    Post count: 6

    Hello LI team,

    I’m trying to understand the scenarios of when using futures for implementation of your strategies is preferred to ETFs.

    When it comes to volatility ETFs (e.g. ZIV), I understand that there’s constant rebalancing + a 1.35% fee on top of it… which can be avoided by shorting VIX futures for months 4 through 7 directly. My understanding is that the only limitation and reason why one would want to use an ZIV vs. futures is the account size ($$) and the case where one isn’t familiar with futures or how they work. Is that correct?

    When it comes to Treasury futures (e.g. UB future), things are a bit more murky. It seems like shorting TMV isn’t a bad idea as it’s got good daily volume, fairly tight spreads and you are shorting the 3x ETF and hence are profiting from both constant rebalancing / fees / fact that treasuries are going up.

    In this scenario, when does it makes more sense to buy treasury futures vs. shorting TMV? Is it solely a factor of account size where if you’re working with large accounts (say, in excess of $5mm), using futures is more convenient or is there a different use case here that I’m not seeing?

    Many thanks!

  • Vangelis
    Moderator
    Post count: 154

    Philip,
    Thanks for your well thought out questions. You raise a lot of layers, and you obviously have done a fair bit of homework. I have traded a moderate amount of future contracts (S&P, Russell & VIX), and have helped build some systems with futures, so I can add some insight, but I am far from the “final” answer here.

    Once someone has sufficient knowledge, experience and account size, futures can be amazingly powerful. Perhaps too powerful (leverage) for some, as it is possible to be confused into thinking in terms of how much money someone is “putting down” for the contract, while one should be making decisions based on the underlying value the contract represents. I have not traded nor studied Treasury futures, and the array of ETFs variations work pretty well for me, so I will let others jump in on those.

    Benefits of futures: huge leverage, efficiency (fairly liquid trading 24 hour cycle), easy and natural shorting (many ETFs can be a hassle to short), and, for some types like commodities and the VIX, can use the backwardation/contango contract information to provide an additional edge (although implementing that edge can be tricky). Generally, one should understand future contract combinations (long/short) with different contract months as a conceptual variation of option contracts. If the account capital allocating to the position aligns nicely to the contract sizing objective, then no real negatives. For me, I sometimes do a lot of smaller fine tuning of position sizing, trading around a position and mixing with option layers, so futures do not so easily blend as well with that style of trading.

    I hope that helps.

  • Philip
    Member
    Post count: 6

    Hi Scott,

    Thank you – this definitely helps, although I think a bit more soul-searching is required on my end. I believe Frank uses UB (Treasury) futures, so perhaps he could chime in on the subject if/when he has a moment?

    Another question – for the UIS that you publish, you specify 50% ES futures, 50% UB futures (for example, I know the allocation varies). The question here is this – for what month would you buy said futures (both ES/UB ones) and when would you roll them?

    Inquiring minds and all that… thanks again! 🙂

    • Frank Grossmann
      Moderator
      Post count: 159

      now I would invest in the March UB and US futures. I would roll about 1-2 weeks before expiry at March 20 into the June futures

  • Philip
    Member
    Post count: 6

    Thanks Frank – that’s what I was looking for!

    If you get a chance, could you please give your thoughts on shorting TMV vs. buying UB futures directly… seems like shorting TMV is still more profitable overall, the only issue is nearly complete lack of leverage for 3x funds.

  • Frank Grossmann
    Moderator
    Post count: 159

    I don’t understand what you mean with lack of leverage for 3x funds. 3x means 3x leveraged.

  • Philip
    Member
    Post count: 6

    Hi Frank,

    Yes, that’s my bad – I didn’t phrase it correctly; I meant that the available leverage with futures is significantly higher (not that you’d necessarily want to use it).

    I’m still trying to come up with a use case for buying UB futures directly vs. shorting TMV… that was my real question here. My take on it is:
    * Buying futures directly allows for more leverage/accommodates larger account sizes/futures are available for trading for ~ 23 hours/day.
    * Shorting TMV lets you take advantage of a the rebalancing/decay/management fee as well as the fact that typically treasuries do go up.

    That’s my take on it – have I missed something/is there something you’d add above? Thanks again!!

  • Frank Grossmann
    Moderator
    Post count: 159

    For me the main reason to buy UB futures instead of TLT is that you do not have to pay the 30% witholding tax on dividends.

  • Philip
    Member
    Post count: 6

    Very good point and one I completely missed – knew there had to be something. Thanks Frank – appreciate your thoughts, as always.

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