Online Trading Blog

With the increasing popularity of exchange traded funds (ETFs) in recent years, the futures contracts on them are also becoming popular. Although traded much differently, ETFs futures also allow the traders to profit from the price volatility of tracking index or market. They were introduced into the market in 1997 and currently there are three stock index futures traded – S&P 500 Depository Receipts (large-cap stocks), NASDAQ 100 Index Tracking Stock (top 100 financial companies listing on NASDAQ) and IShares Russel 2000 Index Fund (small cap stocks).

Trading ETFs futures is completely different from trading ETFs.

• They are not traded in shares but as standardized units of 100 shares.
• They do have expiration dates on which the settlement is physically settled by delivering the underlying futures contracts.
• They are traded through futures account, not through securities account.
• Futures have inherent leverage on margin, often up to 15:1, allowing traders to control more money than they deposited.

ETFs futures can offer all the advantages of underlying ETFs such as diversity, liquidity and low/no tracking error. The added advantages include easy to own underlying ETFs, easy to hedge portfolio risks, easy to go long or short at any time without borrowing the shares. They are electronically traded and demand low capital requirements. But ETFs futures can also be riskier; and futures trading demands strategies different from stock or ETF trading.

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