Equity index futures traders are increasingly relying on a new tool when news hits. Gone are the days of total reliance on a broad-based index like the S&P 500. Now, more of them look to S&P Select Sector Index Futures to make tactical decisions about their portfolios.
Select sector futures set a single day record on June 12 with total volume of 121,805 contracts across the 10 E-mini S&P Select Sector Index Futures. The day’s volume had a notional value of $7.9 billion, with the utilities and financials sectors accounting for 54 percent of that.
A small part of the volume came from the quarterly roll on June 12, but open interest in the contracts steadily rose all year, reaching 122,650 on that day, the first time it crossed the 100,000-contract mark.
So why the sudden interest in select sectors?
Hallie Martin, equity and index strategist at Deutsche Bank, says the demand growth for sector-based products comes in part because of the Federal Reserve’s normalizing monetary policy and proposed fiscal policy changes by the Trump administration.
Although overall S&P 500 volatility is low, volatility between the different sectors reflects changes in market participants’ expectations of interest rate direction and gives participants more opportunity for tactical portfolio moves. That’s being seen in spread trades between the financial and utilities contracts, as an example.
“When we see the interest rate curve steepening, this tends to be positive for the financials and when it flattens that tends to be positive for the utilities,” Martin says.
One example of how sentiment changes was the shift in investor flows in the industrial sector. Using the sector ETFs as a proxy, she says industrial ETFs saw $7.5 billion in post-election inflows, but that reversed in June, when industrials saw $1 billion in outflows, likely because of news headlines suggesting a stall on potential infrastructure spending.
“On the fiscal side, the infrastructure spending is a key catalyst. On the macro side the weakening of the dollar is a benefit” for exporters, she says.
Trading on the News
Major news can also be more specifically addressed through positions in select sectors. For example, when Amazon announced it was buying Whole Foods on June 16, consumer staples reacted, closing lower.
Until now, the most liquid way to express these views was to use the Select Sector SPDR exchange-traded funds that track the 10 S&P sectors, says Martin.
But as the recent record open interest shows, more participants are seeking out the Select Sector futures as volume and open interest rise. Part of that is greater familiarity with the product, especially as more participants leave the over-the-counter swaps market to trade on listed exchanges, and part of that is operational and leverage benefits to using futures, Martin says.
“The MSCI futures that (debuted) in the past couple of years helped make participants comfortable with some of these new products which may be more efficient for the kinds of views they’re trying to express,” she says. “These S&P 500 Select Sector futures are great because they are benchmarked to the already very liquid ETFs.”
Martin says open interest in the Select Sector futures contracts rose sharply in June, jumping 67 percent to $8.6 billion, with highest open interest and volumes in the Financials, Utilities and Healthcare contracts.
ETFs also must be fully funded, whereas futures participants can use margin to place positions. Plus, there is a net margining program for the Select Sector contracts when used as a spread, whether between the sector contracts or the broader S&P, she says.
Because investors can look at volume, open interest and commitments of traders’ data from the Commodity Futures Trading Commission, it gives insight to consensus views, says Martin.
“You can look at that activity in the sector futures products to gain insight into how participants are positioned.”