I recently got a mail from IB touting their new lineup of equity index CFDs. As I trade a lot of equity index ETFs I thought I’d take a look at them, in case I could get away with lower margins and/or commissions. Here’s a quick summary of what they offer:
- Granularity compared to futures, minimum size $1 x index value (for U.S. indices).
- Reasonable commissions.
- Low margin requirements compared to ETFs.
- No MOC/LOC orders, or any way to not pay the spread.
- Local regular trading hours only, sometimes not even that. Can’t trade foreign index CFDs at the end of the US session.
- Trade in local currency, conversion costs if trading foreign indices.
- Pretty low size limits for any one order.
- Interest amounts to an additional cost of ~0.004% per day held.
- Found fills to be somewhat haphazard, even for small order sizes.
Assuming $0.005 per share in commissions and $0.01 in slippage for ETFs, and $1.64 in commission and 1 tick in slippage for futures, here’s how they stack up against each other:
|CFD||ETF (SPY)||Futures (ES)|
|Market (1 tick slippage)||0.023%||0.011%||0.020%|
|Limit/On Close (no slippage)||N/A||0.004%||0.002%|
|CFD||ETF (QQQ)||Futures (NQ)|
|Market (1 tick slippage)||0.019%||0.023%||0.012%|
|Limit/On Close (no slippage)||N/A||0.008%||0.003%|
The costs are similar for all three instruments if you’re doing market orders, though CFDs can of course get costlier if held for longer periods of time. The main advantage of CFDs is the ability to control size compared to futures which are not particularly granular. For that privilege you give up the flexibility of trading outside RTH, which can be a significant disadvantage if you want to place protective stops, or want to trade foreign indices at the end of the day.
Another alternative, of course, are leveraged ETFs, which tend to offer a lower commission per unit of exposure, but have other costs associated with them: spreads for ETFs such as QLD (2x) and TQQQ (3x) are generally at 2-3 cents, management fees of around 1% p.a. (or about 0.0027% per day), as well as potential rebalancing costs. They also do not offer any advantage in terms of margin.