SPY is a favourite ETF for passive investors into the S&P500 index. How about using ES for passive investing? Wouldn't the leverage be desirable given that stocks usually go up in the long-term? All the books I have read about passive investing do not suggest using ES. Is it a bad idea? What did I miss?
Using stock index futures for passive investing
- Thread starter helpme_please
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The spread is the implicit dividends.
Not only add 8 commissions, but 4 taxable events vs zero.
Notional value of an ES contract is $123,600 at the current price, and required margin is $4,200, which is about 30/1 leverage. During the financial crisis, the S&P 500 dropped almost 50%, which means you would be wiped out long before you hit bottom. Even adjusting the contracts for 2/1 leverage is playing with fire if you just intend to hold for a long time.
The other responders also have good points about the commission costs with each contract roll, plus the tax hit - you are taxed on the gains every time you roll.
I see the spread is negative so deduct that from the commissions.
Notional value is irrelevant. It is your account size/margin/contracts ratio what tells your the true leverage.
Using an example, let's say the SPX drops 1%, that would be about 25 points in the ES. If your account is 10K and you use 1 contract, losing 25 points equals a $1250 loss, so 12.5%, thus your leverage was 1:12.5
If you start to use 2 contracts, your leverage goes up to 1:25.... If your account size is 50K and you still use just 1 contract, your leverage dropped to 1:2.5
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Finally someone gets it.
It's hard to think about taxes when you are paper trading, board has too many of them.
I am not any kind of tax expert or other financial advisor, but my layman's understanding is that, for holding a position over multiple years in an taxable United States account, S&P futures contracts have what, in such a case would be a substantial disadvantage: taxation under Internal Revenue Code (that is, United States Code, title 26), section 1256, which treats gains as 60% long term, 40% short term, regardless of hold time, and requires all positions to be marked to market at the end of the year (that is, treated as if they were sold at the end of the year and immediately repurchased, with no wash sale rule). So you would lose not only 40% of the benefits of the long term capital gains tax rate, but also the compounding tax advantage of holding an investment over multiple tax years.
On the other hand, if you are trading a tax advantaged account that offers essentially no margin on stocks but does for futures, then that might be what you want (as long as you understand the risks), in which case you should be able to reduce the number of trades you make by buying futures that expire later. For example, I see that the September 2018 ES futures contract currently has a bid-ask spread of one tick (0.25 tick size x $50 contract multiplier = $12.50).
On the other hand, if you are trading a tax advantaged account that offers essentially no margin on stocks but does for futures, then that might be what you want (as long as you understand the risks), in which case you should be able to reduce the number of trades you make by buying futures that expire later. For example, I see that the September 2018 ES futures contract currently has a bid-ask spread of one tick (0.25 tick size x $50 contract multiplier = $12.50).