Hedge fund portfolio managers looking to buy a fund tracking the S&P 500 have more choices than ever before, HedgeWorld News reports, but in most cases, they will choose an S&P 500 Index futures contract over a SPDR or other exchange-traded fund.

For one thing, the transaction costs on futures trading is lower then on ETFs. Another major advantage of futures is that they are taxed differently. Since they are considered to be a commodity, the tax rate they go under is much lower then that of securities. Sixty-percent of the profits from a futures contract are taxed at the lower, long-term capital gains tax rate, and 40% at the higher, short-term capital gains tax rate, whereas 100% of the profits from ETFs are subject to short-term capital gains taxes.

Futures are also a way for smaller funds to obtain leverage. That is one of the factors that has led to the accelerated growth in futures trading; the average dollar amount per day for the E-mini S&P 500 futures contract is $40 billion to $50 billion, compared to the $6 billion to $8 billion for SPDRs, according to David Lerman from the Chicago Mercantile Exchange.

However, for small hedge fund managers, ETFs may be a better choice, as they are fully liquid and can offer more appropriate hedges. Hedge fund portfolios are not always compatible with the S&P 500, and thus should not be hedged with S&P 500 futures.

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