Why Long Index and Short Futures Can Outperform Cash Returns
Summary
A portfolio long the EuroStoxx 50 total return index and short its futures appears to earn about 15% over ten years, exceeding the return of three-month Euribor. The discussion explains why this spread should not be treated as a risk-free arbitrage. A practical assessment must model the actual implementation: financing the index position, futures margin costs, contract rolls, and bid-ask costs. The suggested roll calculation uses futures prices around expiration rather than simply omitting returns on rollover dates.
Differences in dividend treatment also matter: the index and futures may reflect different tax assumptions, and the short futures position carries dividend uncertainty. Other risks include interest-rate and policy changes, regulation, market-maker capital constraints, and transaction costs. The responses say that accounting for these frictions should make performance broadly flat over time, with varying positive and negative periods. This is a conceptual explanation rather than a documented backtest; exact results depend on the instruments, tax treatment, funding terms, and execution assumptions used.
Key ideas
- A long index and short futures position may show returns above a cash benchmark when implementation details are omitted.
- A realistic simulation should include financing, futures margin, contract rolls, and bid-ask costs.
- Index dividend reinvestment and futures pricing can embody different tax assumptions.
- The futures position retains dividend and other market risks, so the spread is not risk free.
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Full text
# EuroStoxx50: long index and short futures # EuroStoxx50: long index and short futures If you look at a cumulative return of a very simple portfolio, consisting of long EuroStoxx50 total return index and short EuroStoxx50 futures, you can see that over the last 10 years this portfolio accumulated c.15% of return. In theory, return of this portfolio should be equal or very close to a risk-free return. But when you look at a cumulative return of 3M Euribor, you see that over time the above-mentioned portfolio strongly outperforms this 'risk-free benchmark'. Why is it the case? PS. I accounted for the roll-over Fridays and subsequent Mondays by excluding returns on those dates. ## Answer by Ivan (score 3) https://quant.stackexchange.com/a/37728 Small details accumulated over 10 years will explain the discrepancy. You need to simulate the actual strategy i.e. include cost of funding the long index leg, cost of margining the futures leg, replicate the index roll properly (create a composite rolled-future index where the 3rd Friday return is VG1(Friday close) / VG2(Thursday close) - 1 and take the bid-ask of the roll into account (assume 1 euro). The performance over 10 years then will be generally flat, with positive and negative periods and no obvious arbitrage. I don't know how SX5T is calculated top of my head but the reinvested divs are almost certainly at a tax rate (either worst-case tax rate or zero) different from that implied by the futures price (which reflects an "average" (in some sense) tax rate of participants). That will also explain part of the difference. In reality you won't have that exact tax rate on your SX5T holdings. Finally by trading the future you run dividend risk, it is small as it's short-dated, but it exists. You don't on your SX5T leg. ## Answer by AlRacoon (score 1) https://quant.stackexchange.com/a/37699 From a mathematical perspective and under the capital market assumptions of finance theory, you would be right. However in real life, there are a number of risks that remain that keep this from being a risk free return. Among these risks are dividend risk, taxes and tax risk of different investors, interest rate risk and central bank policies, inter and intra country regulatory risk, capital requirements of individual market makers, roll risk etc.; as well as transactions costs. Market participants assess these risks and price it into the markets. There is almost never a truly risk free arbitrage.
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