Equity index futures are standardised cash-settled forward contracts. These derivatives require only a small fraction of the notional contract value up-front, in the form of margin, set by the listing exchange. Index futures are expiring contracts, listed on a quarterly schedule with the near month contract typically offering the most liquidity.
An ETF is a pooled investment vehicle, which by design is a fully funded instrument. Shares of an ETF represent undivided ownership of the underlying assets managed by the issuer. The ETF’s management expense ratio (MER) is typically the most important determinant of holding cost.
From an operational perspective, the futures contracts expiring structure and the ETFs open-ended structure are a clear fundamental difference.
For investors using futures to obtain longer term beta exposure, regular rolling of future contracts from one contract to the next is required as they expire. In contrast, ETFs have no set maturity, and beyond the reinvesting of dividends (in cases where the ETF distributes income, rather than reinvesting it), there is limited ongoing maintenance required.
While liquid futures contracts are typically only available on a limited number of equity indices, ETFs now offer liquid access to a wider range of targeted exposures.
ETFs represent pro-rata physical ownership of assets while futures are derivatives. So, while seeking the same replication, ETFs and index futures will present structural, operational, and regulatory differences important to the vehicle selection process.