There are a number of large trend-following CTAs that have been successfully running for 10+ years. Their main instrument is diversified futures. Why not ETFs (is it due to liquidity / scaling, costs, risk)?
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$\begingroup$ There are some people trading ETFs in this manner, they are just not called "CTAs". Meb Faber for example. But they use less leverage than is possible with futures. $\endgroup$– Alex CJul 20, 2016 at 11:02
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$\begingroup$ @AlexC wanted to use the "CTAs" here to refer to any large trend-follower. $\endgroup$– A.L. VerminburgerJul 20, 2016 at 12:26
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3 Answers
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Leverage: futures usually require much lower margin than their ETF counterparts. For example /ES (E-mini S&P 500 futures) requires about \$4K overnight maintenance margin per contract (may vary by brokerage) to control 50 times the S&P 500 index (currently valued at about \$108K). This is over 20:1 leverage. Furthermore you do NOT pay interest on your short positions.
Tax Benefits: in United States the futures contracts typically qualify for the so called Section 1256 Contracts and have special tax treatment. You may be able to significantly reduce your tax liability on realized short-term gains compared to ETF.
Commissions: in general commissions are lower with futures contracts.
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There are also quite a few futures markets that don't have a corresponding ETF. For example I don't see an ETF for Feeder Cattle,Slovenian Power, Shanghai Rebar, and many more.
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I am going to speculate here. Scale. Say for equities the futures market is bigger than the actual spot market (presumably because you can have cash-settled rather than physically settled contracts); would appreciate if anyone could dig up some numbers. This means more capital can be employed making the strategies more scalable.
As far as leverage is concerned -- don't necessarily have to see it that way. Instead of leverage you can see it as an intermediate settlement mechanism + stop loss bundled into one. To properly manage risk conceptually you could have the full nominal allocated to the position (10% for margin and say 90% put in some short-term fixed income vehicle for the life of position).
Another aspect could be access: futures are an almost 24/7 market, ETFs -- not yet.
Finally -- ease of shorting.
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$\begingroup$ Got some numbers (though more would be appreciated) for daily volume: E-mini S&P 500 -- 192 bn, SPDR S&P 500 -- 20 bn. $\endgroup$ Oct 18, 2019 at 5:51
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$\begingroup$ There are lots of reasons, if anything the question should be why you would use ETFs. Leverage is an ancillary benefit, but the primary reason is using a contract well-specified to the task at hand. ETFs can take many forms and it's unlikely a given ETF will perfectly coincide with a strategy you're looking to implement (this is actually a reason to use OTC forwards in lieu of futures, but that's a separate discussion). And 'access' is also ancillary...most trading (at least on globex) takes place during standard market hours. $\endgroup$– ChrisFeb 26, 2020 at 18:35