High ETF cost savings predicted for switching out of futures

Cost cutting aheadCosts savings for investors who switch from futures contracts to exchange-traded funds (ETFs) to gain index exposure this December could more than double, an ETF provider claims.

Source, which recently launched a high profile marketing campaign for its ETF products, says savings of between 30 and 50 basis points (bps) a year will be possible for some investors in some indices compared to the typical 18 bps in the past.

The savings take place around the quarterly futures ‘roll’ – when stock market index futures expire and investors replace them with new contracts – in December.

The December contracts expire on December 18, and investors would typically roll in the week leading up to this expiry date.

Source’s analysis is based on the cost comparison of its own ETFs with the costs of futures linked to five indices – the Euro Stoxx 50, the S&P 500, the Stoxx Europe 600, the FTSE 100 and the MSCI Europe.
Rick van Leeuwen, a European capital markets specialist at Source, says: “The December roll is typically more expensive for futures contracts. This is because the increased regulatory pressures imposed on banks following the financial crisis means they are less inclined to hold higher risk assets on their balance sheets towards the end of their financial year.

“The banks have to hold more collateral to cover this risk, so they help compensate for it by charging higher prices to act as counterparties for futures contracts.”

But he adds that, even taking the seasonal factors into account, the savings from investing in ETFs rather than futures is at an all-time record high.

The final roll cost will not be known until after all the dividends are paid out, in February or March 2016, but current indications – van Leeuwen says – point to this being much higher than in previous December rolls, potentially up to 50 basis points annualised.

Source estimates that $100 billion (€92 billion) of assets have been switched globally into ETFs from futures over the last two years, largely because of ETF charges falling.

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