Comparing the exposure of ETF, futures, and index options for S&P 500 (SPY, SPX, ES) and Nasdaq 100 (QQQ, NDX, NQ)

The S&P 500 and the NASDAQ 100 are two of the most popular stock indexes.  Below are tables that show different ways of getting exposure to these stock indexes.

S&P 500 Index Exposures:

Product	Price	multiplier	exposure	SPY equivalent shares	option contract exposure	SPY equivalent option contract exposure
SPY ETF	445	1	$445	1	$44,452	1
ES Futures	4,463	50	$223,156	502	$223,156	5
MES Futures	4,463	5	$22,316	50	$22,316	0.5
SPX Index	4,463	100	$446,312	1004	$446,312	10
XSP Index	446	100	$44,631	100	$44,631	1

1 SPX Index option has roughly the same exposure as 10 SPY ETF options

From the above table, you can see that depending on how much exposure you want, you can pick from a variety of products.  For pure delta exposure, SPY ETF and ES Futures are the most liquid.  For options, SPX Index and SPY options have the most liquidity.  There are definitely other ETFs, like IVV, VOO, or SPLG with lower expense ratios, but suffer from options volume and have a wider bid-ask spread, making it more expensive to trade even though it may be cheaper to hold long term.

NASDAQ 100 Exposures:

Product	Price	multiplier	exposure	QQQ equivalent shares	option contract exposure	QQQ equivalent option contract exposure
QQQ ETF	351	1	$351	1	$35,149	1
NQ Futures	13,894	20	$277,877	791	$277,877	8
MNQ Futures	13,894	2	$27,788	79	$27,788	0.8
NDX Index	13,894	100	$1,389,384	3953	$1,389,384	40

1 NQ Futures option has roughly the same exposure as 8 QQQ ETF options

For pure delta exposure, QQQ ETF and NQ Futures are the most liquid.  For options, NDX Index and QQQ options have the most liquidity.  However, with NDX having such a large exposure NQ futures are also reasonably liquid.

When the ETF is better than Futures or Index Options:

1. Buy and Hold - Just want simple long term exposure (greater than 1 year in the US as stocks and ETFs held more than a year at taxed at a lower rate). 
2. Dividend exposure, with the ETF you will get regular dividends whereas the index and futures products price embeds the dividend
   
3. Shares, by owning the shares you can lend them out to generate yield

When Futures or Index exposure is better than ETF:

1. Capital Efficiency -  requires significantly less capital to get futures exposure, 1 ES Futures can be as low as $12,540 to control $223,156 exposure ( ~18x exposure)
2. Short Term holding - when trading futures and index options (IRS calls them 1256 Contracts), they have different tax treatment where 60% of gains/losses are taxed as long-term rate and the remaining 40% are taxed at the short-term rate (where long-term rate taxes are higher than short-term rate taxes)

How to use both ETF and Index Options effectively together:

1. Determine your core or least amount of stock index exposure you want and use the ETF.  Generally you want to have a long time horizon (greater than a year)
2. If you want more exposure than your core or minimum amount but don't plan to hold it for more than a year, use futures or options futures
3. For hedging and option overwrite strategy, use futures and index options as generally you will hold these less than a year so gains/losses at least 60% can be applied as long-term for taxes.

When it doesn't matter if you use ETF or futures and options:

• In retirement accounts like IRA.  Both Tradition and ROTH don't tax transactions so you want to pick the most liquid and capital efficient

Take-away:

It may seem over-whelming at first with all the different choices between ETFs, index futures and options; but learning how to use the properly can improve capital efficiency, and ultimately returns through taking advantage of products for short-term vs long-term tax consequences.  For example, if you want to reduce your exposure, you can sell some short term exposure through futures or options and if you want to temporarily increase your exposure you can use futures or options; this will enable you to keep your core position and take advantage of the tax difference offered for 1256 contracts.