Download the ETF Desk Reference

ETFs for derivatives users

 

derivatives   Investors who desire index exposure are increasingly finding that ETFs can be an efficient, straightforward alternative to derivatives.

When all cost, operational and investment efficiency factors are considered, investors often find ETFs to be attractive complements to or substitutes for derivatives, especially for fully funded positions.

While ETFs and futures can be used to achieve similar investment objectives,
their carry costs are quite different.

  • ETF carry costs consist solely of a quoted management fee and any taxes related to dividend income depending on client and fund domicile.
  • Futures carry costs are more complex because they are implied in the bought price and are not explicitly recognised.
  • They include an estimate for dividends, repo and financing and are all based on an estimated theoretical fair value.

FUTURES ROLL COSTS CAN BE VOLATILE

S&P 500 future historical mispricing1

Futures rollcosts chart

1. Source: BlackRock, Goldman Sachs, CFTC, as of 31 December 2016.

When comparing ETFs with the most popular credit derivatives, we first consider the differences in composition between the instruments. These differences in composition translate into sector and rating mismatches compared to HE00.

Swaps Charts

Source: Bloomberg, Blackrock. Data as at 9 January 2017.

As the ETF market has grown and institutional adoption has deepened, ETFs are increasingly becoming a reference for options.

KEY DIFFERENCES BETWEEN ETF OPTIONS AND INDEX OPTIONS

Key Differences Chart

ETF OPTIONS COULD BE A MORE ACCURATE HEDGING FOR HOLDERS OF ETF POSITIONS

Options Chart

Investment comparisons are for illustrative purposes only and meant to be all-inclusive. Options on iShares ETFs are issues by the Options Clearing Corporation, which is not affiliated with BlackRock. BlackRock does not offer or issue options on iShares ETFs, not is this a service provided by BlackRock. There is no guarantee that options will be available for any particular ETF. BlackRock does not provide tax advice.