Exchange traded funds (ETFs) are investment vehicles that resemble mutual funds but trade like stocks and have been around since 1993. Stock-index futures were first introduced through the Chicago Mercantile Exchange (CME) in 1997. Since then, volume has increased on a yearly basis. As of 2007, there are three different futures contracts traded on ETFs, reports Hank King for Investopedia. They are:
- Standard & Poor’s 500 depositary receipts (tracks large-cap stocks)
- Nasdaq-100 Index tracking stock (tracks Nasdaq’s top 100 non-financial stocks)
- iShares Russell 200 index fund (tracks small-cap stocks)
Below, King gives some ways to tell ETFs apart from futures on ETFs:
- ETFs trade in shares, which are ownership in a trust or portfolio. Futures on ETFs trade in contracts of 100 shares that represent a legally-binding agreement to buy or sell the future at an agreed upon price at a future date.
- ETFs do not have settlement dates. Futures on ETFs have sellers that deliver the underlying ETF shares to the buyer at expiration. Any futures on ETFs contracts that are offset before expiration are cash-settled.
- ETFs require investors to have a securities account. Futures on ETFs require investors to have a futures account.
- ETFs settlement occurs three business days after the trade date. Futures on ETFs are market-to-market daily, which means it is examined to ensure margin (borrowed money that is used to purchase securities) requirements are met.
- ETFs are regulated by the SEC. Futures on ETFs are regulated by the Commodity Futures Trading Commission and the SEC.
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