What If a Futures-Based ETF Never Had to Roll Again?

A Futures Contract Without an Expiration Date?

Futures have been an important building block of the ETF industry for years.

They allow ETFs to provide exposure to commodities, digital assets, leveraged strategies and other markets where derivatives may be the most efficient way to implement an investment strategy.

But traditional futures have one unavoidable feature: they expire.

For an ETF that wants continuous exposure, that means periodically selling a contract approaching expiration and buying another with a later expiration date.

The fund has to roll.

What if it didn't?

That question is becoming more relevant with the emergence of regulated perpetual futures in the United States.

In May, the CFTC approved the listing of a perpetual futures contract referencing the spot price of Bitcoin on a U.S. regulated derivatives exchange and issued a broader policy statement addressing the listing of perpetual contracts.

Perpetual futures are different from traditional futures in one important way: they don't expire.

For the ETF industry, that could eventually have some interesting implications.

Eliminating the Roll

Rolling futures isn't necessarily free.

The shape of the futures curve matters.

The price of the contract being sold versus the one being purchased matters.

Liquidity and execution matter.

Perpetual futures potentially eliminate that event entirely.

There may also be another important benefit: liquidity concentration.

Rather than having liquidity migrate from one contract month to another as expiration approaches, a perpetual future could potentially concentrate trading and hedging activity in one continuously traded contract.

If sufficient institutional volume develops, that could create a deep and efficient market for establishing and hedging exposure.

For an ETF market maker, that could be particularly valuable.

The Cost Doesn't Disappear

There is a trade-off.

Perpetual futures generally use a funding mechanism to help keep the contract aligned with its underlying reference market.

When demand for long exposure is strong, longs may pay funding to shorts. When short pressure dominates, shorts may pay longs.

For an ETF investor, one way to think about funding is almost like a floating management fee attached to the exposure.

It isn't actually a management fee, however.

The rate can change significantly, and sometimes the fund could receive rather than pay it.

So perpetual futures don't eliminate the economics of maintaining exposure. They change where those economics appear.

Roll economics are replaced by funding economics.

Where Could This Matter for ETFs?

A perpetual future isn't necessarily an improvement for every ETF.

If an investor can efficiently own an asset through a low-cost spot ETF, there may be little reason to introduce derivatives and funding-rate risk.

The opportunity becomes more interesting where derivatives are already central to the strategy.

Leveraged ETFs are one example.

They would still have to rebalance their exposure as markets and fund assets change, but they could potentially eliminate the additional requirement of periodically rolling their futures positions.

Managed-futures and multi-asset strategies could be even more interesting.

These portfolios may maintain futures exposure across numerous markets and use leverage as part of their investment process.

Perpetual futures could potentially allow managers to maintain those exposures without continually managing contract expirations and rolls across multiple positions.

That could reduce one source of portfolio trading and operational complexity.

VIX Versus Oil

Where perpetual futures could be useful may depend heavily on the underlying market.

A VIX futures ETF is an interesting example.

The VIX is an index and isn't physically delivered.

A perpetual future could potentially allow an ETF to maintain exposure without continually rolling from one expiration to another, while potentially concentrating liquidity in one contract.

Oil is very different.

WTI futures are tied to a physical commodity and are used for delivery.

The different expiration months serve an important purpose for producers, consumers and other participants who need to buy, sell or hedge oil at specific points in time.

A perpetual future wouldn't eliminate the need for that function.

So while a perpetual structure could potentially make sense for something like VIX exposure, it may offer far less benefit for a physically delivered market like oil.

A New Tool for the ETF Industry?

Perpetual futures wouldn't make the economics of maintaining exposure disappear. They would change them.

Traditional futures have expiration dates, futures curves and roll considerations. Perpetual futures eliminate expiration but introduce funding rates and different liquidity dynamics.

For some ETF strategies, eliminating the roll while potentially concentrating liquidity in one continuously traded contract could be valuable.

For others, traditional futures—or simply owning the underlying asset—may still make more sense.

What if a futures-based ETF never had to roll again?

For some ETF strategies, we may eventually find out.

Disclaimer

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.