Difference between the SP (big) and ES (e-mini) S&P500 Futures contract
The S&P500 Index is one of world’s globally recognized leading stock indexes for the US equities, only next to the Dow Jones Industrials Average. The S&P500 Index tracks many of the large capitalized publicly listed companies in the world. It is often used as a gauge of the overall short term market direction.
The index was developed and is maintained by Standard and Poors global ratings and is a free float capitalization weighted index. The S&P500 was first introduced in 1923 and started by tracking a small number of stocks, which eventually grew to the 500 companies that it tracks. The stock index was founded by Henry Varnum Poor in 1860 which was later merged with Standard Statistics to become what we know of today as the Standard and Poors 500 index.
Why trade the S&P500?
The S&P500 index grew in popularity among both investors and traders and it is one of the reasons why that today there are many ways for traders and investors to gain exposure to the index. The biggest advantage of the S&P500 index is the fact that traders can track the performance of over 500 companies by trading or investing in the index than having to track the stocks individually.
Different ways you can trade the S&P500
The S&P500 index has morphed into many different financial products. From exchange traded funds (ETF’s) to Contract for Difference (CFD) and futures, where each version has its own benefits and purposes. Based on your trading style and capital, the S&P500 can be traded as SPY (SPDR S&P500 ETF), SPX (Index), VOO (Vanguard S&P500 ETF), IVV (iShares S&P500 ETF), SP and ES (Futures). Both the S&P500 ETF and the CME futures were launched in 1990 to track the benchmark index.
Depending on the type of S&P500 that you trade, the margin requirements, leverage, fees and tick value can vary. The reason behind the many derivative versions of the S&P500 index is because each of the products caters to a different clientele. Therefore, it is not surprising to find an S&P500 product that caters to large institutional investors while another S&P500 product caters to the average retail trader. Still, if you look closely, you will find that the S&P500 futures are the most widely quoted prices in the media.
The S&P500 futures contracts are offered by the CME group under the Globex exchange and offer different types of contracts within the futures market.
Benefits of trading the E-Mini S&P500 Index futures contracts
CME Futures Contract
Liquidity: According to a CME Group report, the dollar value of average daily trading volume for the E-mini S&P500 futures was registered at $138.41 billion, while in comparison, the SPDR ETF had an average volume of $33.98 billion. The fact that the E-Mini S&P500 futures contracts are very liquid allows for traders at all levels to quickly get in and out of the market with reduced slippage and speed to transactions.
Leverage: When it comes to leverage, the S&P500 futures clearly outrank the ETF’s. For example to trade the SPY ETF, a 50% deposit on the transaction needs to be made, based on the equity market margin requirements. This is about 1:2 leverage. In comparison when trading the S&P500 ETF futures, traders only need to put up an initial margin or a performance bond to secure the transaction. In terms of the percentage value, the performance bond is approximately 5.1% of the nominal value of the transaction.
Trading hours: The S&P500 ETF trades only during the trading hours in the US, whereas the S&P500 futures trade 24 hours a day on the CME Globex system.
Tax benefits: For US citizens, trading the futures contracts offers benefits compared to trading the ETF’s. Gains on ETF’s are treated as capital gains and the lower the holding period of the ETF, the less favorable are the tax rates. On the other hand, the index futures contracts such as the SP and ES fall under Section 1256 of the tax code with the contracts marked to market at the end of the tax year, regardless of whether the position is open or closed.
Lower Commissions: The commissions on the futures contract trade is considerably smaller compared to the ETF’s.
Short selling: When you are short on an asset, it means that you have a negative exposure. With the ETF’s you cannot sell unless you own the ETF. For traders who want to take advantage of a price drop in the SPY for example, short selling is the next best option. However, this means that you borrow the ETF from the broker and pay an interest to the lender of the ETF, which is typically the broker. The interest charged can vary, but is usually set around 40bps. Besides the interest, the short seller of the ETF must also deposit an additional 50% of the notional trade in cash. Combined, these charges can significantly eat into your capital and also reduce your profit margins.
With futures contracts, you can sell at ease, as long as there is a buyer who is willing to sell to you. The margin requirements remain the same (just as you would buy the futures contract), thus making it easier to go long or short on the S&P500 futures.
S&P 500 E-mini Futures Average Daily Volume
Types of S&P500 Futures Contracts
The CME Group offers two variants of the S&P500 futures contract. They are:
- Standard “big” futures contract (Ticker: SP)
- E-Mini futures contracts (Ticker: ES)
The standard “big” contract size is typically traded by institutions and commercial trade managers and is traded on the open outcry auction system at the CME trading pits.
The e-mini futures contracts for S&P500 are more preferred by the average retail trader due to the contract and tick size.
The following table gives a brief comparison between the SP (big) and the ES (e-mini) futures contracts.
||$250 x S&P INDEX
||$25/ 0.10 INDEX POINT
||MARCH, JUNE, SEPTEMBER, DECEMBER
|E-MINI S&P 500
||$50 x S&P INDEX
||$12.50/0.25 INDEX POINT
Contract Size: This is the amount of the underlying asset represented by each contract. In the case of SP futures contract, one contract is equivalent to $250 x 2000 (where 2000 is a hypothetical value of the S&P500 Index). Thus, when you purchase a big contract for SP futures, you control $500,000 of the S&P Index.
Now, if you trade the e-mini S&P500 futures, one standard contract controls $50 x 2000 (where 2000 is a hypothetical value of the S&P500 Index), which is $100,000.
Contract size plays an important role as it affects the initial margin and price movement per tick. Generally, a higher contract size requires larger margin per contract and the tick movement in price could affect your capital on the whole.
The margin requirements for trading the S&P500 index futures at CME is different based on whether you are trading the SP (big) contracts or the E-mini (ES) contracts. According to data from the CME website, the initial margin or performance bond and maintenance margin varies for the two types of S&P500 futures contracts, summarized below.
The tick size of the S&P500 futures varies based on the type of futures contract being traded.
For a standard big SP futures contract, the minimum tick value is 0.10 index point, meaning that a full 100 point or a $1 move in the SP is equal to $250. On the other hand, the e-mini S&P500 futures contract has a 0.25 point tick size. Therefore, a 100 point move in the ES e-mini futures contract is equal to $50.
E-Mini S&P 500 Futures Chart
Which S&P500 Futures contract is right for me?
For most retail traders with an average trading or investment amount of $50,000 or less, the E-Mini S&P500 futures (ES) contracts are the most ideally suited. From lower margin requirements to risk management, trading the e-minis puts you in a better position to manage your risk while at the same time reap the benefits of your futures contract trading, when you are right.
Here is a summary of what we learned in this article and the reason why the e-mini futures contracts are ideal for the retail trader.
- Lower margin requirements: Depending on the broker that you trade with, the margin requirements for one E-Mini S&P500 futures contract can vary from as little as $2000 to $5000 (rounded off) while the maintenance margin required to be maintained at all times is another $5,000 (rounded off). For a trading capital of $50,000, the initial and maintenance margin required is about $10,000 or 20% of the capital
- $12.50 per 0.25 Index point: With the pricing on the E-Mini S&P500 futures starting at a 0.25 index point with a value of $12.50, the retail trader is better able to control their risks, leaving enough room for breathing space on their trades
- Leverage: Based on the broker that you trade with, the leverage can vary, which allows you an additional lower barrier to trade the E-Mini’s, as compared to the full SP futures contracts
- Highly Liquid market: The E-Mini S&P500 market is very liquid and is one of the most popular equity futures available to trade. This ensures that traders can take intraday positions as well as trade for the long term. E-Mini’s are no longer the domain of just the retail investor but also includes other participants such as pension and mutual funds, insurance companies and other institutional entities
- Tax Benefits: US citizens trading the e-mini futures contracts can avail a tax rate of 60% on the long term capital gains + 40% of the ordinary income tax rate, which averages to about 19% – 22% in tax. For more specific numbers pertaining to this, please consult with your financial advisor
- Almost a 24 hour market: The E-mini’s trade for nearly 24 hours during a weekday. The sessions are categorized into the day session which is around 0830 – 1515 CST where most of the trading takes place, followed by afterhours trading which starts from 1530 through 0830 hours CST
- No Market Making: Unlike the stock market where the order you send may or may not be filled, the E-Mini’s work on a FIFO model (first in first out), meaning that whether you are trading 1 contract of 50 contract, your order is filled with no preferential treatment
- Electronic trading: The E-mini contracts are traded on the Globex electronic exchange, whereas the SP big contracts are traded via the exchange trading pits with inherent delays on the electronic trading systems