E-mini Nasdaq 100 Futures versus Nasdaq ETFs

In 1999, stocks were riding a 17-year bull market.  Outperforming all other sectors were technology stocks as they were in a massive up rise that dwarfed the major averages.  During this time two products were launched that would change the face of investing in technology. In March, the Nasdaq 100 ETF (ticker: QQQ) was launched and became quite successful. A few months later, CME Group introduced an E-mini Futures contract on the Nasdaq 100 index and it too, became a hit relatively quickly.  Investors would be able to invest in a basket of the top members of the technology sector with the click of a mouse.  Moreover, both products had extremely high correlations since both tracked the Nasdaq-100 cash index.  This high correlation allows for hedging and spreading opportunities for investors.

And with the convergence of the internet, on-line trading and a major bull market in tech shares (not to mention the huge success of the E-mini S&P 500), both products met with tremendous success.  But over the last 19 years since the launch of these two products, the dollar flows into the E-mini Nasdaq 100 futures (Ticker: NQ) pulled away from the Nasdaq 100 ETF (QQQ) and now are far greater.

When you compare futures like the NQ with QQQ ETF, it should come as no surprise why futures far out-trade ETFs.   We created this module, so you could see the advantages of trading Nasdaq futures over ETFs.   Let’s do a detailed comparison of the futures with ETFs and see why futures are the more compelling instrument.

Benefit Nasdaq 100 Futures (NQ) Nasdaq 100 ETF (QQQ)
Management fees None, there are no annual management fees with NQ futures QQQ has .20 percent annual management fees
Capital efficiencies Futures margin is capital efficient, with performance bond margins usually less than 5% of notional amount ($5,800 currently) Reg-T margins with stocks and ETFs are 50% of the value of the stock or ETF .  This is far larger than futures.
24-hour trading access Yes—trades nearly 24-hrs daily; beginning Sunday evening through Friday afternoon While some firms offer “after hours” trading, ETFs can’t be traded 24 hours a day.
Liquidity Primary futures contracts such as the E-mini, Treasuries, Crude, Metals all far out trade (in dollar terms) their ETF counterpart (see chart below) Good liquidity but not as much critical mass as futures       (see chart below)
Tracking to underlying Futures track underlying index very closely, minimizing tracking error Some ETFs have major tracking error. QQQ tracks closely
Tax advantages Profitable short-term trades with futures will pay significantly less in taxes than with an ETF due to IRS Section 1256 treatment (60/40 blend of short and long-term gains) All short-term profits with ETFs pay ordinary income rates.

Clearly, futures offer some compelling advantages to large and small investors alike. These advantages have not gone unnoticed by equity/technology investors.  In fact, if you look at the average daily dollar volume comparisons between Nasdaq futures and their corresponding ETF (see figure 2 highlighted in red), you will notice that futures trade 8x the average daily dollar amount of their ETF counterpart.  In addition, futures on Treasuries, Crude oil and Gold trade far greater notional amounts per day than their corresponding ETFs each day.

Figure 2:   Source:  CME Group, Bloomberg

While it is true that both Futures and ETFs are regarded as two of the most successful instruments ever introduced, futures hold the lead in many categories in a head to head comparison.

If you have questions send us a message or schedule an online review .

Peter Knight Advisor


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