It’s no secret that we’re not a fan of Commodity ETFs vs their future counterparts with past posts titled: “Commodity ETFs Suck.” We have a running monthly table going that tracks a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year and in doing so take on costs the simple strategy does not have.

There’s one part of this discussion we’ve left out, the benefits and risks of Stock Futures Indices contracts, compared to their very popular ETF counterparts. Lucky for us, the CME group just released a succinct whitepaper titled, “The Big Picture: A Cost Comparison of Futures and ETFs.”

What we particularly enjoy was that they took the time to come up with multiple scenarios, and multiple short and long term investing options. Overall, here’s the conclusion the CME came to:

CME roll cost futures

(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: CME Group

They actually calculate how much better futures are than ETFs in the report, although it’s spread around and a bit hard to find – but don’t worry, we’re here to help. Here’s the cost savings, per CME, of doing futures versus stock ETFs over 12 months given different ‘scenarios’.

Now, the $10,000 trader isn’t going to lose too much sleep over this – after all, 50bps is just $50 (0.50%*$10k). But 50bps might keep the institutional investor doing $100 million blocks of stock up at night. That’s $500,000 worth of cost savings someone might enjoy saving.

Curiously, it looks like the CME came out with this report just as the advantage has been shrinking – with the “implied financing cost” in the futures rolls getting more expensive, meaning more roll cost, meaning a tougher comparison to ETFs (but maybe that’s their angle, after all, coming out with this report to say “we’re still better, even though not as good”) Here’s the growth in the “cost” of rolling the ES over the past 3 years with their explanation:

Historically, the implied spread to Libor of ES futures was below the lowest management fees on any ETF. Over the 10 year period between 2002 and 2012,the ES futures roll averaged 2 bps below fair value.

Since 2012, the pricing of the roll has become more volatile and traded at higher levels as shown in Figure 1, with the richness averaging 35bps in 2013 and 26 bps in 2014.

This recent richness is attributable to two main factors: changes in the mix between natural sellers and liquidity providers on the supply-side of the market, and changes to the costs incurred by liquidity providers (particularly banks) in facilitating this service.

In a balanced market, natural buyers and sellers trade at a price close to fair value – neither party being in a position to extract a premium from the other. When no natural seller is available, a liquidity provider steps in to provide supply (i.e. sell futures) at a price. The greater the demand on liquidity providers, the higher (and more volatile) the implied funding costs will be.

The persistently strong S&P 500 returns over the last three years – averaging 20.3% annual growth since the start of 2012 – has caused a decrease in the size of the natural short base as investors reduce shorts and bias their positions towards long exposure. This has increased the demand on liquidity providers – especially U.S. banks – to meet the excess demand.

Beginning in 2013, however, changes in bank sector regulation have increased the capital and liquidity requirements for banks, making it more expensive for them to facilitate futures buyers. The result has been a higher implied financing cost in the futures rolls.

Roll Richness High Low

(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: CME Group

Finally, we’re curious to see if the CME ever does such a report on commodity ETFs versus futures. We doubt they will, as the commodity ETFs (at least the ones not holding metals in a warehouse), actually use the CME’s products, holding futures on each commodity in the ETF. The stock ETFs hold the actual stocks – making them a competitive target for the CME to try a convince people the futures are better than the stock holding ETFs. But the commodities – their winning no matter which structure you choose. But that doesn’t mean the investor is winning no matter which structure.

Speaking of which, we wouldn’t feel right discussing futures vs ETFs, without including our monthly table:

(Performance as of 2/27/15)

Commodity ETF Over/Under Performance 2015





Crude Oil $CL_F
Brent Oil $NBZ_F
Natural Gas $NG_F
-0.43% font>
Cocoa $CC_F
-0.12% font>
Coffee $KC_F
-2.87% font>
Corn $ZC_F
-2.30% font>
Cotton $CT_F
Live Cattle $LE_F
-0.38% font>
Lean Hogs $LH_F
-14.24% font>
Sugar $SB_F
Soybeans $ZS_F
Wheat $ZW_F
-1.47% font>
Average strong> -3.60% strong> -6.04% strong> -2.44% strong> font>
Commodity Index $DBC -1.52% font>
Long/Short Ag Trader CTAs 0.17%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index