From the September 2013 issue of Futures Magazine • Subscribe!

Leveraging futures vs. ETN differentials

On the other hand, a negative difference means that a change in the ETN price could not overcome the negative change in the futures price. Thus, the indication would be to buy the futures and sell the ETN to cover the trade.

From Jan. 3 to April 30, 2013, there are 11 dates on which the difference in percentage changes exceeds 40 basis points (0.40%). In eight of these, the difference is positive (buy ETN, sell futures), with three dates showing a negative difference (sell ETN, buy futures). 

Results for the 11 spread trades are summarized on “Spread profit: Copper futures vs. ETN” (below). In each trade, 2,500 ETNs are spread against one futures contract of 25,000 pounds of high-grade copper. This ratio generally produces a net one-day investment of approximately $20,000.

Of the 11 spread trades, eight are profitable, with the highest return being April 16-17 at $1,325. Two trades show losses ($150 April 25 and $200 April 30). One trade, resulting in no gain and no loss, occurs on the weekend of the big shake-out in metals prices, April 12-15. Because of the large dollar amounts swinging both ways on this date, it appears that the market was able to counteract possible losses in either direction. Futures and ETN price charts described earlier indicated that huge gains and losses were at stake at this mid-April event, from which the metals are still recovering.

Are the profits on these trades realistic? To a certain extent, the results are hypothetical and depend on actual market prices reflected in end-of-day numbers. Actual trading results could vary significantly from those shown here. It also is surprising that a positive dollar amount could remain for retail trading following arbitrage between ETNs and futures.

Paul Cretien is an investment analyst and financial case writer. His e-mail is 

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