The Differences Between Trading ETFs And Futures

Posted by jessica on July 16th, 2021

ETFs vs Future: The best financial instrument between two 

Do you wish to earn a massive amount from the financial market in 2021? Or would you wish to become an integral part of the financial trading market? Then you have landed on the right page. Here, we will discuss two popular financial market instruments. 

Both futures contract and Exchange-traded funds or ETFs provide numerous trading opportunities to traders looking forward to investing in the capital market. Both futures and ETFs are ideal tools for fulfilling almost any financial objective either is its execution of hedging techniques or grabbing the short-term scalping opportunities. So, choosing between both is a hard task. In the article, we have listed several points that will help you decide between ETFs and futures trading. 

What are ETFs and Futures? 

The first thing that strikes while drawing a comparison between any asset, market, or entity is its definition. No comparison starts without defining two entities because it clears half of the concept. 

1) Futures: Futures agreements are generally known as the financial derivatives. In standard definition, we can say that the futures agreement is a contract signed between two parties to sell or purchase a specific quality of financial instrument or commodity at a specific price on a predefined date in the future. The CFTC or Commodities Futures Trading Commission is the United States' financial body that presides and regulates numerous derivatives markets worldwide. 

2) ETFs: As per the United States SEC (Securities Exchange Commission), Exchange-traded funds is an investment firm registered with the SEC. In general it is a security which involves a set of assets, such as stocks and bonds. These securities generally track an underlying index. However, they can spend in other sectors also or may use various other techniques. An ETF contains the features of mutual funds and also has the functionality of traditional stock trading. 

For determining the best financial instrument to invest in, you need to consider the case-by-case basis. Both ETFs and futures are popular and viable ways concerning the contemporary financial world. Along with this, they both have their own cons and pros. 

Comparison between ETFs and Futures

1) Underlying Asset: The value of futures and ETF items lies on the value of the collection of assets or underlying asset. Currencies, indices, equities, debt instruments, commodities all are addressed. ETFs are not regarded as financial derivatives (most of the time) whereas Futures products are. 

2) Size and scope of each market: 

Since its introduction in 1993, ETFs have earned huge popularity. The global financial market contains more than 5,000 ETF, contributing and making the total value of trillion. Talking about standardised futures agreements, these have always remained as the global financial benchmark for derivative products. As per the report of 2017 total futures agreements signed in that particular year were 14.8 billion. 

3) Liquidity and market volatility 

Content liquidity and volatility are essential aspects of an active trader when he is trading any financial instrument. Both futures and ETFs have a different level of liquidity and volatility which differ from product to product. However, when we compare both, we see that the ETF shows a greater degree of price volatility. 

4) Rollover: The pricing volatility of future contracts surges with its expiration. On the other hand, ETFs do not expire, and hence this eliminates the rollover period for traders to navigate.

5) Direct pricing: The worth of futures agreement lies on the underlying asset. In other words, we can say that there exists a direct relationship between the two. For example, if the price of gold surges on the spot market, the price of gold futures also hikes. On the other hand, the value of an exchange-traded fund lies in the collection of securities or assets. For instance, even if the gold value surges, the gold ETFs price does not change. External forces, including waning interest and corporate earnings in the ETF items, may limit returns. 

6) Leverage: The underlying securities of the futures agreement are highly leveraged. Generally, the margin set by various exchanges lies typically between 5 and 15% of the aggregate contract value. The margin trading for ETFs is more or less similar to conventional stocks fixed at 5%. 

7) Average daily trade: The popular futures trading offers higher average daily traded volume and deeper markets to traders than exchange-traded funds. Higher participation in the market reflects the trade orders are carried with the tighter ask or bid spreads and minimal slippage. 

8) Trading hours: Along with the above factors, the other important factor of comparison is trading hours. The futures market remains open 24 hours a day and five days a week for traders to trade electronically. On the other hand, ETFs provide limited trading hours which generally correspond to the concerned stocks markets.  

9) Fees 

The vital aspect of the market which a trader should look upon before jumping directly into the market is accounting for fees. Mitigating the sunk cost, eliminating any undue fee and commission, is an excellent way to determine any trading operation's cost structure. ETFs and futures can also be differentiated considering the commission and cost. 

1) Commissions: As ETFs and stocks are traded similarly; hence both are subjected to brokerage common when purchasing and selling assets. Futures contracts are also subjected to exchange or clearing fees, national futures association (NFA) fee, data fees and brokerage commissions. It may vary from broker to broker.

You can go with Global TradeATF. The firm is regulated and a safe venture to invest with. It offers commission-free trading and high leverage up to 1:500 on trade. The broker facilitates trading on both ETFs and futures. Visit the official website for more. 

2) Management fees:  ETFs generally stick to an annual expense ratio of 0.44%. Futures investors generally avoid these management fees unless he/she participates in the managed-futures program. 

10) Tax

Tax liabilities are a major issue for all investors and traders irrespective of novice or experienced. Tax rates on ETFs and futures contract change depending on the underlying asset, county of trader and holding interval. The tax guidelines for trading futures and ETFs are as follows: 

1) Futures: The tax associated with the futures trading is relatively complex to interpret. Rate lies on the frequency of trade and also varies greatly. In the United States of America, the futures trading tax rates lie between 40 and 60. Thus, ensuring a maximum capital gains tax of about 23%. But, his value is only for the USA. It varies from country to country.  

2) ETFs: Issue country is largely vital when selling and purchasing ETF products. The capital gains tax changes significantly from one county to another. For example, the United Kingdoms may incur capital gain tax on ETFs at the rate of 18% or 28%. Other countries may have less or higher tax structure than this. 

To conclude, we can say that in many situations, commissions and fees related to the futures contracts are less in comparison to ETFs. However, it is vital to complete essential due diligence to determine the domestic tax obligations and fulfil them accordingly. 

Which is better: Futures or ETFs? 

Choosing a financial instrument from the market requires a vigilant evaluation to make a potential decision as it is your hard-earned money you will put at risk. ETFs provide easy access to the financial market (for retail traders), professionally managed funds, and long-term investment features. On the other hand, futures provide you with relatively good volatility, market liquidity and extensive margin. 

So, think before choosing. Your final decision should always lie in your comfort zone, investment objectives, the time you can spend on monitoring your trade. The financial market instrument that stands on all these points will help you grab better profit from the market and enhance success changes. 

The Bottom Line 

Choosing the right instrument is a challenging task. Both futures and ETFs have their own pros and cons, as mentioned in the article. Are you still confused? Don't worry; we have another solution to your problem. Have you heard about a demo or virtual trading account? It is a free online trading account offered by brokers to practice trading and test your trading strategies before jumping directly into the financial market. You can decide between pursuing trade through this account. 

Global TradeATF also provides a free demo or virtual trading account to its clients. You can go with it. 

Q1) What is a futures contract?

A futures contract is an agreement signed between two parties to buy or sell an asset at a predetermined price on a specified future date. 

Q2) Which is better ETFs or futures trading? 

Both these have their own pros and cons. The final decision should depend on your comfort zone, investment objectives, the time you can spend on monitoring your trade.