Faced with increased regulatory burdens and higher capital reserve requirements, some financial institutions are turning to exchange traded products as replacements for pricier derivatives instruments.
Institutional investors have historically favored swaps and futures for broad equity benchmark exposure, but “the growing popularity and declining cost for certain exchange-traded products has allowed ETPs to challenge other instruments in ease of use and total cost of ownership,” reports Ari Weinberg for Pensions & Investments.
Institutional investors, including endowments, pensions and sovereign wealth funds, have been embracing ETFs as lower cost alternative to futures and swaps. Earlier this year, analysis from Bank of America Merrill Lynch noted that long-term investors looking for $100 million worth of S&P 500 exposure would save $250,000 in annual fees by opting for ETF exposure rather than futures.
In a recent note, BNP Paribas sounded a similar tone, saying “To avoid potentially elevated futures costs (and cost volatility), our analysis finds that investors not seeking levered exposure may consider ETFs as a suitable alternative to maintain a long position in the underlying S&P 500 index,” reports Weinberg for Pensions & Investments.
The SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest ETF, charges 0.0945% per year, or less $9.50 per $10,000 invested. [Hedge Funds Love These ETFs]
A similar scenario has emerged in Europe where futures contracts have also become more expensive.