Source, a leading European provider of exchange-traded funds, has released research indicating that the cost benefits enjoyed by investors adopting exposure to leading equity indices through ETFs is potentially at record high levels when compared to using futures contracts. Previously, investors could capture an average annual benefit of 18 basis points (bp) on certain indices but the Source analysis now suggests the potential benefit could be between 30 and 50bp.

While ETF investors have traditionally enjoyed cost savings of around 18bp per annum compared to futures investors, this saving is estimated to increase to 50bp, according to research from Source.

Long-term futures investors are required to ‘roll over’ their positions on a quarterly basis due to set expiration dates on their contracts. A ‘rolling cost’ is incurred when the investor sells his contract and buys a new contract. The Source analysis points out that rolling costs have been increasing recently and are set to reach historic levels at the upcoming roll period in December. In contrast, once investors have established a position through an ETF they need only pay the annual management fees.

Part of the reason behind the increasing rolling costs is the new regulatory restrictions imposed on financial institutions. These banks have historically been the suppliers of contracts to the futures market. Due to regulations such as Dodd Frank, Basel III and the Volcker rule, banks have begun to pass on higher prices to futures investors as a means of managing their own increasing costs of capital and stricter reserve requirements.

Rick van Leeuwen, European Capital Markets at Source, commented: “The December roll is typically more expensive for futures contracts. This is because the increased regulatory pressures imposed on banks following the financial crisis means they are less inclined to hold higher-risk assets on their balance sheets towards the end of their financial year. The banks have to hold more collateral to cover this risk, so they help compensate for it by charging higher prices to act as counterparties for futures contracts.

“Even taking the seasonal factors into account, the savings from investing in ETFs rather than futures is at an all-time record high. The final roll cost will not be known until after all the dividends are paid out, in February or March 2016, but all indications right now point to this being much higher than in previous December roll periods, potentially up to 50 basis points annualised.”

The five indices upon which the report is based are the Euro Stoxx 50, S&P 500, FTSE 100, Stoxx Europe 600 and the MSCI Europe. It is estimated that over $100bn of assets have been transferred from futures-based exposure into ETFs over the past two years owing to the increasing cost savings attributable to the ETF format.