There are many benefits to trading futures vs ETFs (Exchange Traded Funds). While they have some similarities such as liquidity, transparency and tax advantages compared to stocks, futures provide traders with additional benefits which are leading more self-directed investors to add futures to their portfolio.
Learn what advantages futures offer over ETFs in this 2-minute video:
- No Management Fees – When trading futures, you do not pay a management fee. With ETFs, you are usually charged a fee that equates to a small percentage of your balance plus any commission fees.
- Capital Efficiency – Futures margins are capital efficient with performance bond margins usually less than 5% of the notional amount. Margins with stocks and ETFs are 50% the value of the stock or ETF.
- Liquidity – Popular futures contracts such as the E-Mini S&P 500, Micro Treasuries, Micro Crude Oil and metals, “far-out trade in dollar terms” and offer much more substance than an ETF.
- Tracking the Underlying – Futures contracts follow the underlying market very closely, with little or no tracking error. Some ETFs have reported significant tracking errors which can prove problematic.
- Tax Advantages – A profitable short-term trade with futures will pay less in taxes than with an ETF due to IRS Section 1256. Under this section capital gains and losses are calculated at 60% long-term and 40% short-term. With ETFs, short-term profits pay ordinary income tax rates.
- Round-the-Clock Trading – The markets are moving around-the-clock. If you want nearly 24-hour access, 6 days a week, then futures are a better option than trading ETFs.
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