Futures 101: https://www.cmegroup.com/education/file ... utures.pdf
I'm going to skip the basics; read the above if this whole topic is new/foreign to you. The title of this thread begins with PP inspired so let's make the discussion relevant.
The main things we need to consider when deciding whether or not to use futures are as follows: Costs, trading convenience, portfolio suitability, taxes. (I may think of more as I write, but I'll start here...additionally this may be a multi-poster. I'll write as much as I have time/desire to take on, make a logical break and pick it up where I leave off.)
When looking at costs I specifically mean trading costs. Tax affects will be covered later. Generally a thorough review of costs include spreads, commissions/trading fees and depth of book. When we discuss futures we also need to add the impact of futures contract contango/backwardization.
Using gold as an example to explore costs. (Note: Costs can and do evolve over time...the best we can do is see what our cost options are today)
If we go by the Gold FAQ it looks like the commission for physical gold is 5% plus a continuous cost of storage protection which if Google is correct and you don't have a lot of physical gold is going to be around $25 a year (safe deposit box). The details on the costs of protecting gold are beyond the scope of this post...but we do care about commissions and unless I misread the FAQ it would be a 10% haircut for buying and then selling.
ETFs: UGLD's spread according to ETF.com .09%, DGP's is .6% GLD's is .01% and IAU's .08%
Futures: GC (x100) .01%, OC (x50) .04%, MGC (x10) .02%
So let's do the spread
math on our largest increment position size which is the GC futures contract with a value (tonight) of $132700 and make it a round trip.
Physical - $13,270 (ouch)
ETFs - $26.54 to $1592
Futures - $26.54 to $106.16
The math speaks for itself: GLD and the GC futures contract are the least cost winners when it comes to a single buy and sell.
Let's take a look at commissions
Physical - Covered in the spread calcs, so we will call this a "zero commission" trade
ETFs: Let's call it $10 round trip...could be a little more or a little less.
Futures: Let's call it $5 round trip...your mileage may vary
are the gift that keeps on giving annually
UGLD 1.35%, DGP .75%, GLD .40%, IAU .25%...for a three year hold $132700 turns into 127,392 (-4%/-$5308) for UGLD and 131,704 (-.75%/-$995) for IAU.
Note: A bit of rounding in the above figures and the assumption is zero change in underlying price.
An interesting point to note here...for a long term hold maybe that physical stuff isn't so bad at least as compared to say UGLD. I did this analysis in hard $$$ because I think it makes it more tangible than %%% reporting. Hopefully the fair reader has also noticed that based on your hold period (and frankly a bunch of other stuff we will eventually get to) what may be "best" ends up being a big "it depends." Yup, nothing is ever as easy as it seems.
I think I'm good for tonight and feel free to double check my calcs and assumptions. In fact, feel free to shred it if I missed something you think relevant...the point is to learn/bring all the useful info to bare on the subject. Tomorrow I'll hit the final cost component unique to futures...contango/backwardization and how the "spot" price for physical differs from the price of the future...this aspect can make a Trumpian YYYUUUGGEE difference on the returns we get. In fact, part of my real money port this year is an experiment in action so I get a better internal feel for the relevant dynamics and actual costs. I may get several months into what I am currently invested in and toss it overboard because of something learned along the way. Nothing like reality to help one learn.