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Continuous Index-Futures vs ETFs for buy & hold


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Continuous Index-Futures vs ETFs for buy & hold

  #1 (permalink)
Eratosthenes
Göttingen, Germany
 
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Hello and greetings to all users here,

I'll introduce myself soon in the corresponding section. But right off the start I've got a question that's been in my mind all the time:

Does it make sense to use (for instance) the S&P500 Micro (MES) future or any other continuous index future for long term buy&hold instead of an ETF like the VOO?

At first glance it seems to me that there are many advantages like higher leverage (will leave sufficient cash to secure against margin call), no real Margin credit like with ETFs, so no interest payments for money lent from the broker.
As there are continuous futures for all indices, I wouldn't even have to bother to roll them every few month manually. In case there are any disadvantages with continuous futures than I would choose the normal contratcs instead and roll them manually 4x/year.

Only concern that comes to my mind are potential cost for rollover from one expiration date to the next version. I have to admit that I simply don't know whether there are significant rollover costs at the end of the expiration date of one contract to the next. At the moment with 3 month distance between the different contracts each MES-Version differs in about 1%, that is about 40 points, which might suggest rollover costs of about 4%/year due to four rollover-Transactions.
But the current June-contract is far from it's expiration date. So near the expiration date the difference might chance, depending on the expectations?
Are the rollover costs of continuous (index) futures in any way roughly predictable?

Somone told me recently that the following contract would be even slightly cheaper, "due to interests", which I couldn't understand.

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  #2 (permalink)
 
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 blackgrey45 
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I would use the ETF. You get a dividend. Use futures for swing and day trading.

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  #3 (permalink)
 tr8er 
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You cannot trade a continuous contract, you always have to trade the front-month and roll it over before expiration.

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  #4 (permalink)
Eratosthenes
Göttingen, Germany
 
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tr8er View Post
You cannot trade a continuous contract, you always have to trade the front-month and roll it over before expiration.

I don't want to trade it. I just want to hold it long term for at least 5 years like an ETF. As I understood a continuous contract is just a series of normal contracts which are rolled over automatically near expiration.

But whether continuous contract or normal contract, I have no idea whatsoever whether index futures in general are a really suitable replacement or even better solution for long term buy & hold compared to ETFs, which a futures-Trader claimed to me. He thinks there is no catch in rolling Index Futures for years in a row and that they were superior as long term index investment over index ETFs. But I found virtually no information in the internet that adresses exactly this strategy. That's strange for such an obvious question. So I'm a bit sceptical.

The point is that I want leverage, but in times of very high interest rates I don't want to use a margin credit. As mentioned above, I would leave sufficient cash to secure against margin call and secure against drastic market corrections with a wide SL. It's just about higher leverage and avoiding the interest.

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  #5 (permalink)
 tr8er 
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Eratosthenes View Post
I don't want to trade it. I just want to hold it long term for at least 5 years like an ETF. As I understood a continuous contract is just a series of normal contracts which are rolled over automatically near expiration.

But whether continuous contract or normal contract, I have no idea whatsoever whether index futures in general are a really suitable replacement or even better solution for long term buy & hold compared to ETFs, which a futures-Trader claimed to me. He thinks there is no catch in rolling Index Futures for years in a row and that they were superior as long term index investment over index ETFs. But I found virtually no information in the internet that adresses exactly this strategy. That's strange for such an obvious question. So I'm a bit sceptical.

The point is that I want leverage, but in times of very high interest rates I don't want to use a margin credit. As mentioned above, I would leave sufficient cash to secure against margin call and secure against drastic market corrections with a wide SL. It's just about higher leverage and avoiding the interest.

If you want to hold it for many years, it doesn't make sense to use futures (futures are something to trade short-term), in this case you should use ETF's.

Continous contracts is just a charting-tool to see the contract without the roll-over gaps, it shows back-adjusted data and is over the years way away from the real data that happened in the past, if you want to see the real prices from the past you have to use a continuous contract with "not back adjusted data".

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  #6 (permalink)
Eratosthenes
Göttingen, Germany
 
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Can anyone tell me explicitly what the disadvantages of holding (rolling) an index future like the ES or MES for long term (i.e. several years) are, compared to an Index-ETF?

Ok, there are no dividend payments. But that disadvantage is compensated by far by not having to pay the currently high interest rates on a margin credit when holding a future.
Furthermore I have considerably higher leverage with futures compared to an ETF. So less cash is blocked, even allowing for the safety amount against margin call in market corrections. Of course I would set a wide SL against outright market crashes as I would do with an ETF as well.
Taxation is purportedly not an issue while rolling a future from one contract to the next.

So the only problem that I can see might be the yearly cost of rolling the future four times. But as I wrote in the start posting, I don't know yet, how significant the price difference in two consecutive MES contracts is, when the earlier contract reaches it's expiration date.

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  #7 (permalink)
 58LesPaul 
Owensboro, KY
 
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Eratosthenes View Post
Can anyone tell me explicitly what the disadvantages of holding (rolling) an index future like the ES or MES for long term (i.e. several years) are, compared to an Index-ETF?



Ok, there are no dividend payments. But that disadvantage is compensated by far by not having to pay the currently high interest rates on a margin credit when holding a future.

Furthermore I have considerably higher leverage with futures compared to an ETF. So less cash is blocked, even allowing for the safety amount against margin call in market corrections. Of course I would set a wide SL against outright market crashes as I would do with an ETF as well.

Taxation is purportedly not an issue while rolling a future from one contract to the next.



So the only problem that I can see might be the yearly cost of rolling the future four times. But as I wrote in the start posting, I don't know yet, how significant the price difference in two consecutive MES contracts is, when the earlier contract reaches it's expiration date.



When you mention rolling from one contract to the next you just mean you are selling the expiring contract and buying the next contract, correct? If so, you would have to pay taxes of course.



I know someone that did just what you are speaking of but haven't heard from him in years. He has some Wyckoff threads on different message boards, this one too I think. His name was DBPhoenix if you want to search his old threads where he may have mentioned it.

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  #8 (permalink)
 kevinkdog   is a Vendor
 
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58LesPaul View Post
When you mention rolling from one contract to the next you just mean you are selling the expiring contract and buying the next contract, correct? If so, you would have to pay taxes of course.



This is not how US taxes on futures are calculated. All positions are marked to market at end of year. Does not matter if you rolled or not. The tax you owe is based on the change in total equity during the year - including any open and closed positions.

60% of total gains are considered long term gains for taxes, and 40% are short term gains - regardless of holding time.

So for taxes, rollovers simply have no impact (except for the transaction costs).

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  #9 (permalink)
 58LesPaul 
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kevinkdog View Post
This is not how US taxes on futures are calculated. All positions are marked to market at end of year. Does not matter if you rolled or not. The tax you owe is based on the change in total equity during the year - including any open and closed positions.

60% of total gains are considered long term gains for taxes, and 40% are short term gains - regardless of holding time.

So for taxes, rollovers simply have no impact (except for the transaction costs).

Can you explain this for this dummy?

I was assuming he was in profit each time he sold one contract and bought the next, which I shouldn’t have. So if he was profitable when he sold and bot he would have to pay taxes unless the position he’s holding at end of year is at a loss and any loss would offset his gain?

Thanks

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  #10 (permalink)
 kevinkdog   is a Vendor
 
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58LesPaul View Post
Can you explain this for this dummy?

I was assuming he was in profit each time he sold one contract and bought the next, which I shouldn’t have. So if he was profitable when he sold and bot he would have to pay taxes unless the position he’s holding at end of year is at a loss and any loss would offset his gain?

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It is all marked to market for tax purposes.

Let's say:

he sold 1 during year for $5000 profit during a roll
he sold another 1 during year for $1000 loss during a roll
at year end he has $7000 open profit

Taxable P/L for year = 5000-1000+7000 = +$11000

He has to pay taxes on this amount.

Next year, he starts out the year with $0 P/L and that open position is "marked" to the Dec 31 closing price (that is what "marked to market" means).


Hopefully that explains it.

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