Maximizing Capital Efficiency with Sector Futures and Options

Sector futures and options are powerful, capital-efficient tools for market participants seeking equity sector exposure. Discover the potential capital efficiencies and other cost efficiency advantages compared to traditional ETFs.

Capital efficiency¹

CME Clearing provides margin offsets between options on Sector futures and the underlying Sector futures ² Options on Sector futures will also have margin offsets with the broader Equity Index complex, such as E-mini S&P 500 futures (ES).

Examples

Using E-mini Energy Select Sector futures (XAE) as an example, here are potential capital efficiencies available:

• Initial margin on a long position in E-mini Energy Select Sector futures is currently approximately 7%.
• As a comparison, an OTC sector swap under ISDA SIMM margin requirements (UMR) currently has 19% initial margin, so futures offer 12% capital savings.³
• The equivalent ETF is fully funded, so futures offer 93% capital savings.
• Some fully funded investors may choose to hold stocks in a margin account, but that would require a minimum of 50%. In this scenario, futures offer 43% capital savings.⁴
• There is a 55% margin offset between E-mini Energy Select Sector futures (XAE) and E-mini Industrial Select Sector futures (XAI).

There is also a 70% margin offset between E-mini Energy Select Sector futures (XAE) and E-mini S&P 500 futures (ES) (in 2:1 ratio).

Find out more about capital efficiencies on Sector futures and use CME CORE tool to examine hypothetical or real portfolios.

Sector futures vs. ETFs

At current market levels, one option contract on E-mini Energy Select Sector futures (XAE) would give an approximate notional exposure of $95,000 (given underlying futures contract size of $100 per index point). This compares to an option on an ETF that tracks the same underlying index, one option contract would give an approximate notional exposure of $9,000.

Expiry efficiency

Options on Sector futures have physical delivery of the underlying Sector futures that instantaneously expires into cash with reference to the equity index Special Opening Quotation. This compares to ETF options that physically deliver the underlying ETF.

60/40 tax treatment⁵

Sector futures may be exempt from IRS Rule 871(m) transaction withholding. As Section 1256 contracts, these products also may qualify for 60/40 U.S. tax treatment rather than ordinary income tax.

Sector futures margin offsets

Disclaimers

[1] Margin requirements are indicative and subject to change

[2] Given options are launching into SPAN and futures are transitioning to SPAN 2 on 18th October and 15th November, the offsets between futures and options will initially be computed by Cross Model offset (CMO) until both options and futures are margined under SPAN2

[3] https://www.isda.org/a/b4ugE/ISDA-SIMM_v2.6_PUBLIC.pdf

[4] https://www.cmegroup.com/articles/2022/capital-efficiency-and-listed-equity-derivatives-take-center-stage-for-final-umr-phases.html

[5] Not intended as tax advice. Please consult your tax advisor and/or FCM for more information.

Explore Equity Index Sector futures and options

Manage sector exposure in liquid, capital-efficient futures and options with our suite of Sector contracts including S&P, Dow Jones and Nasdaq.

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.