You can't deliver the ETF against the futures, so you are exposed to risk of slight change in spread when you close out.... given that the incremental yield to be had isn't that great (except when LIBOR was going crazy), it's a relatively large risk.
Why should I deliver anything? The plan is to just keep the ETF's forever en and roll over the future just before expiration. The last action has to be repeated 4 times per year and these are the only costs (apart from the 0.1% management fee of the ETF's).
What if you are unable to rollover at favorable spreads? And if you let it expire, you get stuck with the opening print on expiration day, which is also risky. Delivery, as an option, is the only way to insure an arbitrage. In theory if you are trading in large enough blocks to do ETF creation units, then it's a true arbitrage, modulo transaction costs. But I don't think we're talking large blocks on this thread. There is also the issue of ETF expenses.
I don't understand. I make the assumption that the interest (near LIBOR) is always priced correctly into the NQ (as it is one of the worlds most liquid futures its fair value will always be evaluated by the market). The QQQQ is even the most liquid stock in the world. The only risk I see is if I let the future expire, I'm exposed to the QQQQ position. But this is a 50/50 risk/reward situation (eventhough this should not be happening).
Why don't you guys just buy stock symbol BIL & hold it indefinitely? It'll give you interest equivalent to the 1-3 month T-bill. Could you just use the margin it gives off to trade with intraday for no charge?
EFPs pay interest rates near interbank rates, which are considerably higher than treasury bill rates. EFPs are riskier, because they are exposed to the risk that the exchange clearinghouse for single stock futures and options, the Options Clearing Corporation, might collapse; but this type of exchange clearinghouse risk is always present in active trading.
I may have missed this being discussed (I read most of the thread, thanks all for keeping it productive), but I've set up a couple of EFPs in the simulated account to see how they behave. I started a BA DEC07 EFP (long stock, short SSF). I've noticed from time to time while peeking in on it that it will get out of whack by sometimes up to $25 to the good. I've only had it open for 3 days, so $25 seems like quite a good return for the risk. Is this just a price discrepancy that one can take advantage of? Or is it simply the spreads being wide and fooling me? Second question (and much less important). Why would anyone ever BUY an EFP? I notice some are priced very low from an interest rate stand point. Is there a reason to go "long" an EFP in hopes that the interest rate moves? Thank you.
IB's valuation software severely mishandles EFPs. You will observe large and unrealistic fluctuations in the value of EFP positions. These do not present profit opportunities (although it is occasionally possible to profit a little bit from EFP fluctuations, but not the particular type of fluctuations you mentioned). One might purchase an EFP in order to finance an existing long stock position. The resulting interest rate paid, to finance the position, would generally be lower than the broker's interest rate charged on margin loans. One might also sell an EFP in order to increase profits from an existing short stock position. A short EFP would allow one to earn interbank interest rates on the cash proceeds from short sale of stock. This amount will generally be more than any broker will pay on proceeds from short sales.
Jim, I thank you for your response and expertise here. I went ahead and tried to close out the position to see what would happen (simulated account, of course) and I showed a loss at the realized P/L. This confirms what you're telling me.