Why Aren’t There Futures on ETF’s?

Posted by Jeff Carter
on May 31st, 2011

Exchange Traded Funds (ETF) have been a great boon to the stock market. They are great for investors, because it allows them to spread their risk over an entire sector, rather than pick one company. They are great for brokers because it allows them creativity to tailor financial plans to individual customer wants and needs.

Over the past decade, they have exploded. There are more ETFs today than you can shake a stick at. This explosion has attracted lots and lots of cash. They are a great innovative financial success story. However, there is one piece of the puzzle missing.

How do you manage the risk of owning an ETF?

Currently, the only way to do it is to write calls or puts on ETFs. Options. You could also look at the weights of the index and write individual calls or puts on the highest weighted stocks, giving you some comfort in an downturn.

Why aren’t there futures contracts on ETFs?

Clearly, the S+P 500 Futures are a great way to allow funds to manage risk, and the eMini S+P’s are great for the individual investor. The NASDAQ100 and Dow Jones also have futures contracts and mini contracts associated with them. So what would be the harm in listing narrower based indicies that would allow ETFs to have a futures component; allowing investors, funds and brokers another way to diversify and manage risk?

When I searched for the largest volume ETFs, I found some interesting things. Most of the really hot ETFs today are in emerging markets and in physical commodities. Obviously, those ETFs already have futures contracts associated with them. But what about listing a Health Care Index Future? Or a narrow based index comprised of Energy Stocks? Those kinds of indicies would give investors a better hedge to manage risk than simply buying an ETF like SLV and going short the futures.

Having futures on ETFs will add depth to the market. In a melt down, futures will enable investors to get out when they can’t get out in the cash market. As we have seen, the door gets pretty small when everyone heads to the exits at once.

Currently, the SEC bans the practice. It’s more about a turf war between equity exchanges like the CBOE, NYSE, NASDAQ and the CME. It’s also Washington politics, SEC vs CFTC.

We received approval for, and started single stock futures in 2000. However, the SEC gutted the business via regulation. They were listening to their Wall Street friends, and as is typical at the SEC, screwing over the LaSalle Street crowd.

I just don’t see the harm in listing narrow based indicies, margining them like a future, and giving them tax treatment like a future.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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