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

Investing / Others
21

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).

22

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?

23

I just wanted to revisit this, as I have heard rumors about ways around this for a while.

Apparently, you can have US government bonds (which do pay interest) as collateral for futures instead of cash. Although, the interface still shows a debit and credit in cash. That means instead of:

Type Product Allocation Rates Interest
Stocks VWRL 90%
US Gov Bond SHY 10% 4% 0.40%
US Cash USD -5% 5% -0.25%
US Cash USD 5% 0% 0.00%
Index Futures ES (notional) 100%
TOTAL 0.15%

You will get:

Type Product Allocation Rates Interest
Stocks VWRL 90%
US Gov Bond T-Bills 10% 4% 0.40%
US Cash USD -5% 0% 0.00%
US Cash USD 5% 0% 0.00%
Index Futures ES (notional) 100%
TOTAL 0.40%

This information is rather hard to come by. IBKR doesn’t mention it anywhere. Their customer support doesn’t know about it. The internet search engines didn’t find me any such information until recently.

Still, I have seen multiple people claim it works for them. I have now found a public claim through Reddit, which first links to yet another Reddit post, finally arriving on ET. Also, another such claim for those with an account on RR.

24

Interesting Thread, thank you for that.

Futures vs ETF: there are rollover costs, I suppose they are included in the comparison.

I think today’s markets allow arbitrage trades for both and even for the underlying stocks. So the difference may get lower and lower.

A few words about withholding tax on “in lieu of” dividends: the tax is deducted on U.S. shares. It is not deducted on shares of many other countries. If you ask those back in your tax declaration in theory you commit a “cum-ex” fraud.

Unfortunately the internet tax form in Kanton Zurich has no way of declaring partial “in lieu of” dividends. That happens often, the broker does not lend out all of your shares. I usually state it in the comments of the tax declaration in such cases.

I think that is not a small problem for our taxmen. Interactive Brokers does declare everything correctly but I don’t think that all banks and broker do. In Germany alone they discovered billions in cum-ex damage.

If a broker does not declare the partial stock borrowing and charges withholding tax which you ask back, the cum-ex is committed by the broker and you as client cannot do anything about it.

25

Yes, every day the futures price inches closer to spot/index of the underlying, reaching it on maturity. The difference (plus movment of the underlying) is paid each day between holders of short and long futures.

Do you have some more sources? We have a personal account for IE funds. No WHT (especially no US WHT), but IE also doesn’t have their own L2WT.

26

Same account setup here.

In the statement I see WHT on “in lieu of” dividends for U.S. stocks, but not for other countries. I think last time I had partial in lieu dividends was in 2022, let me check…

…found it, was 2022. I had a stock from Argentina, Italy, Luxembourg, Greece, Israel, Netherlands (No WHT), Uruguay (No WHT), Bermuda (No WHT), GB (No WHT) and the Caymans, what a year.

No WHT for the lent out part and WHT for the part that was not lent out in the countries that charge WHT. All the U.S. Stocks that were lent out had WHT deducted, in lieu of or not. In the Zurich internet tax declaration there is no way to declare this situation correctly, had to mention it in the comments.

I looked in “Account management”, “statements”, “Tax”, “2022” “dividend report” to find the relevant information at IBKR.

I think Switzerland has a little problem here. IB does not cheat, but the taxman cannot control the Swiss banks or broker because of the banking secret, therefore it is very easy for them to cheat. I have never seen “in lieu of” dividends in any Swiss broker statement. The fact that in Germany they discovered billions in cum-ex fraud makes me think that in Switzerland there may be some too.

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