Given that futures price is equal to S*e^(rt), it is possible to create a synthetic investment into an index by:

  1. entering into an index future for the amount of money which are planned to be invested into an index
  2. investing this money into a risk-free bond with the same duration as the future (or just keep it in a deposit in a bank)

When such future expires, a new future can be entered into.

I see the following advantages of such strategy compared to buying an ETF:

  1. No need to pay an ETF's issuer's commission. This might not be a big deal for investors from the US, because there are funds with a low commission, but in my country (Russia) index ETFs take 0.6-1% as a commission
  2. ETFs' price follows the index only approximately, which is not true for futures
  3. More liquidity. Suppose you want to cash out part of your investment. In this case, you can just take the money you have on your deposit instantly and cancel out part of future position by shorting instantly. In case of ETF/stocks, you would first sell them, then wait for the settlement, then wait for the funds to be transferred to your account
  4. Ability to take more risk if you'd like to. For instance, instead of buying the government's bonds, it is possible to invest into A+ bonds and earn higher interest
  5. Margining for a risk-free rate. If you'd like to make do some trading parallel to investing, you can use the money not for risk-free bonds, but for buying stocks, which is much cheaper than what brokers charge

The only disadvantage I see is that you will have to regularly re-enter future contracts, but it doesn't seem as a big disadvantage to me.

Yet, future investing doesn't seem to be popular. Why? Are there any flows in my logic?

  • 2
    Futures contracts pay no dividend. Commissions are high on most platforms. Avoid dabbling in futures. It’s too easy to get burned if you don’t understand what happens at expiration, and ESPECIALLY if you think that using leverage is a good idea. Feb 8, 2021 at 3:48
  • 1
    @KeithKnauber Futures effectively pay a dividend because their price is discounted for the dividends that will be paid on the underlying index. If there were a difference in return because of dividends, arbitrage traders would be all over it.
    – nanoman
    Feb 8, 2021 at 4:00
  • People have tried to arbitrage that difference. It turns out to not be so easy in practice to arbitrage that difference. The SPY chart is identical to the futures chart, except at the end of each quarter the ETF pays $1.58 dividend, while ES_F contract does not. Feb 8, 2021 at 5:25
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    @KeithKnauber But SPY drops in price (on average) by the amount of the dividend on the ex-dividend date.
    – nanoman
    Feb 8, 2021 at 5:29

2 Answers 2


It is an interesting idea, but:

  • The minimum capital required for an unleveraged index futures position is prohibitive for most individual investors. For example, a single S&P 500 E-Mini contract has a face value of almost $200,000; even for the new Micro E-Mini it's almost $20,000. This will not work well for monthly investing.

  • Only near-term futures contracts are typically liquid, so you'd need to roll once a quarter.

  • At least in the US, and likely in other countries, favorable tax treatment is given to long-term capital gains of buy-and-hold investors. Gains on futures tend to have a higher tax rate. Also, "0.6-1% as a commission" (one-time) for an ETF is not prohibitive for savings you may hold for decades. (Or did you mean an annual management fee rather than a commission?)

  • You may not receive the full institutional risk-free rate on cash as a retail depositor.

  • If you hold most of the "cash" outside the futures account to try to earn more on it, you may have to keep transferring some of it back and forth to the futures account (to meet the margin requirement during market downturns).

These are the difficulties I see (mostly based on a US perspective), but I acknowledge there could be special situations where this strategy nevertheless makes sense depending on your portfolio size and local circumstances.

  • I meant "an annual management fee". It may sound like a joke, but there is a Russian ETF industry is such a nightmare that there is even an ETF which consists of nothing more but shares of one only BlackRock's ETF, and 1.1% per year are charged for this wrapping
    – kandi
    Feb 8, 2021 at 10:38
  • May be off-topic, but TBH I'm a bit surprised that smaller index contracts aren't being offered given how competitive the financial sector in the US is
    – kandi
    Feb 8, 2021 at 10:43

I wrote up an article on exactly this strategy including how to execute it.

The theory is sound, the strategy should work. And additional huge benefit of doing this is avoiding the 30% dividend tax on US domiciled investments.

The main downsides I noted there are

  • Trading futures and future spreads is a little tricky. It is easy to accidentally buy the wrong amount
  • Although this strategy does not use margin neither for leverage or borrowing, a margin account is being used and there are risks in accidentally using margin unexpectedly
  • The level of insurance or protection in the event certain entities (brokers etc.) go bust is unclear
  • Requires education and training in buying/selling futures and the underlying risks involved

In addition I note that for the strategy to have maximum benefits, you probably want to have:

  • No capital gains tax
  • No other tax related overhead when buying and selling futures
  • A broker with access to trading futures and future spreads
  • A broker providing you with a margin loan facility
  • Looking to invest the equivalent of units beyond $10,000 USD
  • An understanding of futures trading

Comparing this to what you have already figured out, the main trickiness is that entering a long position into a futures position under this strategy requires a margin trading account. You need a broker who will give you that and you need to know how to manage it safely.

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