Indexology®: Implementing Carbon-free Investment Mandates using Index Futures | Page 2 of 2 | ETF Trends

Summing the two quantities gives you the full portfolio value again. As we have mentioned, W’s value was 9% on November 20, 2014. For a portfolio value of $100 million, these two quantities are $107.9 million and -$7.9 million respectively. Therefore, to achieve the goal of removing energy sector exposure while remaining fully invested, one option is to buy an additional $7.9 million in S&P 500 and sell $7.9 million in Energy Sector exposure – a spread trade that can be done all with equity index futures!

And the performance, you ask? The result from futures replication is indistinguishable from the assembling of the S&P 500 ex-Energy portfolio. Of course, the replication of the performance may depend on factors impacting the index futures market and future investment result may depart from what is depicted here.

There are some nuances in using the E-mini S&P 500 Energy Select Sector futures as the surrogate. For those interested, the nuances are explained in CME Group’s publication available here.

This article was written by Richard Co, Executive Director, Equity products, CME Group.