Comparing Futures Total Return to Index Total Return for S&P 500 from 1988 to 2022

Investing / Others
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I found another analysis “ETFs or futures?” by Invesco with data as at 31 December 2020 (there where also older versions). What knowing the right search term (“ETF vs Futures”) does for finding stuff…

They have analyzed following indices from 2012 to 2020:

  • S&P 500
  • FTSE 100
  • MSCI World
  • MSCI Europe
  • STOXX Europe 600
  • Euro STOXX 50
  • MSCI Emerging Markets

In comparison to the paper provided by CME Group (which operates financial derivatives exchanges), the futures cost in the analysis by Invesco (which manages ETfs) is higher, but much more in line with my own calculations.

Their actual comparison to ETFs is of course apples to oranges, too. In their dedicated section about how they compare ETFs and futures (page 12) they discuss their method. They calculate on the basis of a fully funded investor (so leverage = 1x). Under this conditions Futures still pay the risk mark up on the risk free rate, but ETFs don’t, since no money is actually borrowed (= your borrow money to buy ETFs, but your lender is yourself).

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What I don’t understand is this:

  • Going short on a futures contract and hedging it by going long on the underlying is apparently risky. So you want something in addition to the risk free rate and dividends.
  • This results in the observed risk markup required by the marked for buying long futures.
  • But curiously the spread around the price of S&P 500 futures is nearly zero.
  • Why does the market not consider it risky to do the opposite: Going long and hedging it by shorting the underlying? If anything this siphons additional security borrowing fees that should be compensated.

So where is this spread? Is it that the market is so liquid from the long side that this second strategy can not appear? In other words, everyone and their mom wants to be long S&P500 and the arbitrageurs oblige for a risk markup?