Question 1.
Gaining exposure to the S&P 500 index by ETF or S&P 500 futures contracts, rather than constructing a portfolio of shares that replicates the S&P 500 index.
Using the ETF or futures contract would be more cost effective than replicating the S&P 500 index with shares.
Using shares would be a more costly exercise as each transaction buying and selling of shares to construct the portfolio would incur a commission charge.
The ETF or Futures contract will incur a commission charge only on the purchase and sale of the S&P 500.
Like stocks ETF’s and Futures can be traded intraday, so you still maintain the flexibility. The ETF or futures contract allows investors trade the entire market as though you are trading just one stock.
Using this method can be seen as more of a ‘hands off ‘approach for the investor as you do not have to keep a eye on each stock if you were to construct a portfolio of shares. This can be a timely exercise if you were to take this approach as you would constantly need to review your portfolio of shares to ensure you have the correct share allocation that would reflect the S&P 500.
As new companies outside the S&P 500 are added and other companies drop out of the S&P 500 you would need to be aware of this if you were to construct a portfolio of shares, which would once again result in staying well informed and being kept up to date regularly. With the ETF and Futures this would be done automatically.
The ETF and futures option can also provide the investors with the opportunity of short selling. Whereas with portfolio of shares maybe restricted in this area, as some stocks may not be able to be short sold.
The cost of unwinding your position with shares would become very costly that would need to subtracted from any potential profits. Each position would incur transaction costs and placing multiple