Are you overpaying for Beta exposure?

Beyond the Future – ETFs as
financial instruments

Investors seeking to achieve beta implementation have a broad set of vehicles to choose from. Futures have been one of the traditional instruments of choice for institutional investors looking for beta. However, Futures contracts face headwinds driven by the increased cost of capital applicable to banks under the Basel framework and the Volcker rule. As a result, since the introduction of these rules, investors holding long, non-leveraged Futures positions might have noticed an upward trend in the cost of rolling their contracts.

In contrast, ETFs are increasingly gaining traction in their role as financial instruments offering greater efficiency through lower costs.

ETFs generally offer in comparison to most futures:

  • Lower costs: driven by economies of scale and tighter trading spreads resulting from increased liquidity
  • Operational ease: being an open ended vehicle ETFs can be held indefinitely (no need to ‘roll-over’)
  • Precision and choice: with more than 5,200 vehicles available globally, ETFs offer a sheer breadth of choice in terms of exposures – representing a very precise implementation tool for beta investors

*Source: BlackRock, June 2015

Markets are changing. Derivatives are no longer the default way to access beta.