Stock Indices: Which One Should You Trade? $ES_F $SPY

When looking to place a trade in the U.S. stock indexes traders are presented with many different ticker symbols. But, what do they all mean?

FUTURES MARKETS

For example, symbols like the ES (S&P 500’s), YM (Dow), TF (Russell 2000) allow you to trade the index of your choice. Futures are the most direct way to invest in the indexes.

Pros/Cons:
Some of the pros of using futures contracts are high leverage, a clean market with good volume, clean fills and narrow bid/ask spreads. Some of the drawbacks are the high leverage, and difficulty in holding for longer term trades because of the high leverage.

For example each contract in the ES controls around $80,000 of money in the markets. Bottom line? Futures are great for day trading, but are not as great for swing trading. With options on futures there is also the possibility to trade options on the futures indexes.

STOCK ETFs

ETF’s like the SPY, (S&P 500), DIA (DOW), and IWM (Russell 2000) allow traders to buy shares in an index just like they would buy shares in a corporation.

Pros/Cons
The pros are leverage is less, you can make smaller investments in each ETF, since the dollar value invested is less than futures. For example the SPY is trading around $163.00; some brokers will allow you to buy less than 100 shares allowing traders to make smaller sized trades.

Some of the drawbacks are that there can be some lag between the index and the price of the ETF, and it can be more difficult to build to a larger size position. The ETF’s are good for longer-term trades, and if investors what to trade options on the indexes.

CASH SETTLED INDICES

There is a hybrid investment out there that is somewhere between an ETF and a futures contract. The cash settled indexes like the SPX (S&P 500), DJX (DOW) and RUT (Russell 2000), allow investors to have a little more leverage than the ETF’s but less than the futures contracts.

For instance 10 shares of the SPX = 100 shares of the SPY. One benefit is the increased leverage. Another benefit for options traders is that you can’t be assigned stock like with options of ETF’s these indexes are cash settled meaning that all that happens is that there is an exchange of money from your account at expiration instead of an assignment of stock.

Cash settled indexes are good for larger swing trades and options trades, as they will reduce commissions compared to the SPY, because you need to buy fewer contracts to equal the same dollar value investment.

A LOT OF CHOICES

There are many vehicles out there to allow traders to replicate the returns of a stock index. I have just scratched the surface in this article. Next time you are looking to invest in an index look at other alternatives to the ETF’s, and see if they will better fit your next trade.