Abstract
The widespread adoption of exchange traded funds (ETFs) as institutional instruments, tighter trading spreads, and lower fees mean these investment vehicles are increasingly seen by investors as a viable alternative to futures-based exposure. At the same time, the costs of maintaining a given exposure using futures contracts have increased, driven by regulation which has increased capital requirements and which restricts proprietary trading activities. This article 1) summarizes the trade-offs between the use of futures and ETFs for fully funded investors; 2) provides empirical evidence that ETFs are now, in many instances, a lower cost alternative to fully funded futures; and 3) analyses the fundamental drivers of roll mispricing, providing evidence that higher costs for futures reflects longer-run, systematic factors such as regulation that are unlikely to reverse soon. <b>TOPICS:</b>Exchange-traded funds and applications, futures and forward contracts, performance measurement
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