Cash Equitization with E-mini Equity Index Futures

How CME E-Mini Equity Index Futures are Used to Equitize Cash in Portfolios

Cash is a necessary component of just about every investment portfolio. Cash is present in a portfolio for operational reasons including managing subscription/redemption flows and from income streams such as dividends. Non-invested cash can perform an economic drag on the portfolio, reducing performance to benchmarks and peers. Using equity index futures can help a portfolio manager be more efficient and avoid the drag on performance created by the presence of cash in a portfolio. This process is known as cash equitization whereby futures replicate index returns and ensure the portfolio is fully invested, whilst still having cash available for managing flows in and out of the fund.

Drag on Performance

Consider a $100 million fund invested in equities but withholding 1.0% in uninvested cash. Assume an annualized rate of return of 10% over a forty-year period.

Difference in Total Returns, Fully Invested vs. 1.0% Cash w/h

As the chart above indicates, even a small percentage of uninvested cash over time can have a significant negative effect upon performance. In this example, over a 40-year investment horizon this equates to a variance of roughly $161 million, or approximately 10 basis points annual cash drag. This negative result has serious implications for managers and fiduciaries of both public and private funds.

Can an investment portfolio achieve its benchmark objective while retaining a small portion of cash for operational purposes? Yes. The process used to remain fully invested is known as cash equitization (also known as cash securitization or cash overlay). This paper outlines how CME Group E-mini Equity Index futures could be used to achieve this.

Exchange Traded Derivatives: CME Group’s Equity Index Futures

CME Group’s Equity Index futures are part of a large universe of futures and options products known as exchange traded derivatives (ETDs). Futures, as traded and cleared by CME Group, are standardized contracts with fixed expiration dates. The terms of a futures contract can be found by looking at the contract’s specifications.1 Equity Index futures are listed and traded globally on many listed futures exchanges. Most equity index futures contracts are based on a recognized regional or global equity index or benchmark. The table below provides examples of CME Group’s actively traded benchmark Equity Index futures contracts.


CME Group E-mini Symbol

Index Value*

Contract Multiplier

S&P 500




Nasdaq 100




Russell 2000








Nikkei 225 (JPY)




Nikkei 225 (USD)








*Source: CME Group, settlement values from July 31, 2018, September contracts.

Each equity index futures contract has a fixed multiplier. An equity index futures contract’s notional, or financial value, is calculated taking the futures contract’s index value and multiplying it by the contract’s fixed multiplier.

For example, the notional value (NV) of the E-mini S&P 500 (ES) contract based on the data above would be NV = 2817.00 x $50 = $140,850 per contract.

Futures contracts are not assets, they convey no rights of ownership. They simply represent a price point in time. Not being an asset, they do not require 100% payment of their notional value at time of execution. What is required when opening a futures position (long or short), is the deposit of performance bond, also known as margin. The initial margin required by CME Clearing on equity index contracts is a fraction of the notional value and determined by CME Clearing based on statistical analysis of product and market risk. In addition to initial margin, variation margin may be required on an open position if market price levels move contrary to the opening position price or daily mark-to-market levels. Initial margin as of July 31, 2018 on one E-mini S&P 500 (ES) futures contract was $6,160, or slightly less than 5% of the contract's NV.

Constructing an Appropriate Cash Equitization Position

How many futures contracts are required to cover an uninvested cash position?

Going back to our original example, $100 million portfolio with 1.0% of uninvested cash we will use as inputs the ES futures data provided above to construct an appropriate equitization overlay. To arrive at the number of futures contracts needed, take the dollar equivalent of uninvested cash and divide by the notional value of the contract.

For example, Contracts needed = $ value uninvested / NV futures = $1,000,000 / 140,850 = 7.10. Since an investor cannot trade fractional contracts, round to a whole number, in this case seven. The portfolio manager would buy seven ES futures to return the portfolio to a fully invested (99.0% in cash securities plus 1.0% in futures) level. Buying, the ES contract would require an initial margin of seven contracts x $6,160 = $43,120. This leaves a residual cash balance of $956,880 for operational purposes while remaining fully invested to the benchmark (S&P 500) index.

Because cash will continuously flow in and out of the fund, and market levels will move over time, the contract amount will need adjusting periodically. The deep liquidity found in CME’s equity index futures suite, means that these flows in and out of the fund can be executed promptly in order to manage market exposure. Futures are also typically associated with low execution costs. Thus, futures are a very flexible instrument that can be deployed quickly in a cost-effective manner. This is unlike some underlying investments where adjusting a portfolio’s exposure may take time due to the investments’ less liquid nature or have high trading costs (via the bid-offer spread or in terms of trading commissions).

One point to note is that futures contracts have an expiration date, usually quarterly. Therefore, to maintain a constant open position requires rolling an open position forward to the next quarterly contract when the existing position approaches expiration.

Risk managers responsible for multiple funds may aggregate the uninvested cash of all their funds and create a comprehensive equitization overly. Our example used E-mini S&P 500 futures but other index futures may be more appropriate depending on the fund’s benchmark index.


Portfolios will experience in and out flows of cash as a natural function of their business operation. Uninvested cash acts as a drag on the overall performance of fund and can be significant over time. Equity Index futures are an effective, capital-efficient and flexible tool for portfolio cash equitization. That is why the world’s largest asset managers utilize them for liquidity and equitization overlays. Understanding the mechanics of futures contracts, the pricing, costs and capital needed is an important first step to developing a successful equitization program.

2 Cash Equitization: How CME E-mini Equity Index Futures are Used to Equitize Cash in Portfolios




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