Futures vs. ETFs

ETFs (short for Exchange Traded Funds) are commonly used by new traders seeking occasional and global opportunities in commodity markets. However, for more experienced traders who seek to enjoy the full benefits of a more proactive and pinpoint approach to commodity-trading and who are willing to take some risk, entering a position directly on the futures market presents several advantages over trading ETFs, which for most of them have to do with the characteristics of this type of instrument. So what are ETFs?

Exchange Traded Funds appeared in the investment arena in 1993 and have inundated the market ever since. They usually refer to a securities basket approach that tracks indexes and trades like shares. Investors use specialty ETFs when they seek to diversify their portfolio with a basket that focuses on a particular market sector. The problem with this approach is that it combines different securities without giving you the opportunity to make your own combination and focusing your investment strategies on various individual companies or commodities.

ETFs have indeed become an investment vehicle of choice for those wishing to diversify their portfolio through commodities for instance. In fact, precious metals became the starting point for commodities-based ETFs – they were physically purchased. Futures however have many advantages over ETFs:

• Leverage: This is one of the main characteristics – and benefits– of futures contracts. For instance, whereas with ETFs you would have to deposit $50,000 for a contract worth $100,000 of gold (50% of the transaction value), futures would only require 5% of the transaction value or $5,000 (margin requirement).
• Trading times: Since shares of ETFs are traded on stock exchanges, their trading hours are very similar to those of regular share trades. On the other hand, futures can be traded almost 24 hours a day, providing more opportunities.

The benefits listed above are just some of the advantages of futures over ETFs. There are others such as tax issues or the size of the contract. In conclusion, when it comes to trading commodities, ETFs will help those who wish to diversify their portfolio without wandering off the beaten track of investments while futures will make an ideal instrument for those who wish to take full advantage of futures markets through a more specific approach.