It seems that in several areas of the curriculum where they say things like “etfs may be more cost effective than futures” or “swaps may be cheaper than directly investment” but I’m having a hard time putting them all together. Are ETFs cheaper than swaps? What about forwards? Here are all of the options I can think of, any ideas on how we would rank them from cheapest to most expensive? I tried to put these in order myself but I don’t think its quite right… I really have no idea where swaps fit in but I thought I would see what you guys think. Am I missing any? Might be silly but it would seem easier to look at it this way than to memorize a bunch of “x is cheaper than y” statements. (I get that these might not hold true all of the time…) ETFs Swaps Futures Forwards Options Direct investment Closed end funds Mutual funds
ETFs are more tax efficient than either open end or closed end mutual funds. Closed end funds generally trade at a discount to their NAV, whereas open-end funds trade pretty much at their NAV. Futures are traded on an exchange and are therefore (almost always) less expensive than a comparable forward, which is an OTC instrument.
I don’t know if you can come up with a chart that would be representative. A lot of it would really be based on the size of the transaction and the liquidity. Probably a different story if you are looking at $500million in ETF’s vs. $2mill in ETF’s vs another one on the list. There is the section that explicitly details out (which I’m sure you’re on top of) ETF’s vs. Index Mutual Funds (which is really the only list I recall detailing out ETF’s) ETF’s are… -Traded more frequently -License Fees higher -Taxes lower -Fees are brokerage trading fees
yeah a blanket ETF’s are cheaper than swaps probably isn’t going to work. apples and oranges. ETF’s in general- tax efficient. GMofDen is right- there is some section about ETF’s vs index mutual funds- why do I remember something like IIP’s also? what the heck are those? i’m sort of vaguely remember a flashcard of mine. the mutual funds get the better licensing fees (cheaper). ETF’s have commissions. ETF’s trade more liquid than mutual funds that price only once a day. i could def see a swap cheaper than directly investing in something- you get the exposure but don’t have to necessarily fork over the $$ for the asset. that one makes sense.
Something about inefficiencies of closed end funds (as they’re traded on different exchanges) so there’s a lag time in between the closing and opening (different time zones) whereby there’s an arbitrage opportunity available? Yeah, I’m just spewing out shit now; grammar be damned.
Also, with Futures, we would have to roll the contract forward creating another cost .
What are the costs associated with a swap if you find your own terms and counterparty? Are there any?
Dallas, rolling the contract could be either a cost or a gain, depending on if the market is in contango or backwardation, respectively. GMofDen, generally you’d have to employ a broker to find the other side of that swap for you, and wherever on the Street you go to find that counterparty is gonna charge you a teensy weensy haircut - that being said, I don’t believe they mention that in the curriculum.