Micro E-Mini Futures:
A New Way to Trade Futures

Wall Street firms and other large investors have long enjoyed the ability to manage portfolio risk with futures and E-mini futures contracts. Now the same benefits these bigger players have used are available to a wider audience of investors in the form of Micro E-mini futures. These contracts, launched in May by CME Group, are one-tenth the size of traditional E-mini futures for the Nasdaq-100, Russell 2000, S&P 500 and the Dow Jones Industrial Average indexes.

Because of their smaller size, Micro E-mini futures enable sophisticated retail investors to trade futures for a fraction of the upfront financial commitment of E-mini futures. “The smaller contract size makes it easier to execute a variety of trading strategies,” says Tim McCourt, global head of equity index products and alternative investments at CME Group. “Micro E-minis are really opening up the market for futures trading to a whole new audience.”

Traditionally, futures were created for institutional buyers, and involved assets such as crude oil or corn. Hedging—or locking in the price of these products in advance—gave both the buyers and sellers of these assets a way to take some of the volatility out of the market to mitigate big price swings. When retail buyers got into the picture, they weren’t interested in taking possession of oil or corn, of course, but rather wanted to buy and sell futures contracts as a way to speculate on the price direction of these underlying assets and manage portfolio risk. Eventually, the futures market expanded to include individual stocks and indexes like the S&P 500.

The Next Big Thing in Investing
Micro E-minis are taking futures to the next level by making them more affordable for a broader group of investors. McCourt says CME Group's conversations with its clients showed that retail traders weren’t looking at futures trading because they deemed it too expensive.

And in fact, costs have gone up. Since the launch of the E-mini product in 1997, the notional value of these products has increased significantly. For example, the E-mini S&P 500 futures contract went from about $47,000 in 1997 to around $145,000 in April, making the amount of capital needed to access the futures market out of reach for many individual investors.

To counter that barrier, CME Group sliced these futures contracts into even smaller segments. Now the Micro E-mini suite of equity index futures has multipliers that are one-tenth the size of their E-mini counterparts. For instance, the multiplier for the E-mini S&P 500 futures contract is $50 versus $5 for the Micro E-mini S&P 500 futures contract. The multiplier for the Russell 2000 is also $5, while the Nasdaq-100 is $2 and the DJIA is $.50.

- Tim McCourt, global head of equity index products and alternative investments at CME Group.

Interactive Brokers (IBKR), a Greenwich, Connecticut-based brokerage firm, has been offering Micro E-mini futures since they were launched in May. Andrew Wilkinson, Chief Market Analyst for IBKR, says their clients are using these products to increase portfolio diversification and like the fact that they can participate nearly 24/7. “Micro E-minis can help investors manage their equity exposure more precisely or customize their portfolio to help reduce risk,” Wilkinson says. “They also let investors use leverage to obtain greater market exposure, with a smaller amount of capital.” Another advantage, he notes, is that there are no management fees with Micro E-minis so investors may have lower trading expenses compared to other financial products traded in today’s markets.^[1]

Smaller Price, Bigger Benefits^[2]
Aside from their more efficient use of capital—the margin on Micro E-minis is about 5% of the contract value—they also offer some unique tax benefits, says McCourt. Futures have what’s known as blended short- and long-term capital gains tax treatment regardless of how long you hold the contract. There’s also the ease of trading, he says. For the individual retail trader that means when you buy and sell futures they are reported as one line-item on your broker’s statement regardless of how many trades are made.

The investor appetite for Micro E-minis has surpassed CME Group's expectations. In fact, McCourt notes that it’s the most successful new product launch in CME Group's 180-year history. In May, when Micro E-minis were launched, CME Group saw 310,000 contracts traded per day across all four indexes. Today, it’s transacting close to 600,000 contracts traded per day across those four indexes. “As more sophisticated retail traders become familiar with Micro E-minis, not only here but in Europe and Asia as well, they understand what a useful and capital efficient tool this is to have in their portfolios.”