By Ivan Castano, for CME Group
AT A GLANCE
- Challenging macroeconomic factors continue to create opportunities for investors looking to manage sector-related risk
- CME Group offers 19 different Sector futures across energy, real estate, regional banks, and more
“U.S. markets are grappling with high inflation and crucial central bank policy decisions,” Paul Woolman, Global Head of Equity Products at CME Group, said in a recent OpenMarkets roundtable. “As a result, we are seeing dispersion emerging in different equity sectors this year, ranging from energy and technology to regional banks and semiconductors.”
Keeping in mind the headwinds facing the global economy during the second half of 2023, Woolman led Hamish Preston, director of U.S. equity indices at S&P Dow Jones Indices, and Steve Nawrocki, head of equities trading for the Americas at BNP Paribas, in a discussion around what’s next for equity sectors and how traders can use futures to bolster their trading strategies.
When asked how investors can benefit from Sector futures, Preston said firms operating in specific sectors typically have “shared sensitivities” to macroeconomic events and return variables that make them attractive as an investment category. Simultaneously, traders can look at different thematic indices to compare their performance and better inform their strategies.
Financials, Technology Rule the Roost
Referring to specific sectors, Preston said investors are laser-focused on this year’s earlier global banking crisis and artificial intelligence-driven opportunities.
“Many people are looking at financials to understand the contagion aspect and how the rate environment is impacting different companies in the sector,” Preston said. “More broadly, we have seen information technology and communications services companies as top of mind for many people, given the AI news flow that has come to the agenda this year.”
Meanwhile, Nawrocki sees trading demand rising in real estate and retail.
“When I think about the short term, positioning around real estate is going to grow because of rising mortgage rates and the potential for an economic slowdown,” he said.
As far as retail is concerned, “sales are being crucially analyzed, as is spending and discretionary spending,” said Nawrocki. “We are taking a view on real estate but also see a potential bounce in retail when the economy booms again.”
According to Nawrocki, Sector futures have become an essential tool for navigating the markets.
“It has become a necessity to hedge or overlay sectorial strategies for just about any type of investor,” he continued. “Whereas in the past this was limited to long-short hedge funds, in today’s environment, hedge funds, asset managers and even IRAs and private bank allocators are looking to have sectorial views and express macroeconomic outlooks in this way.
“I really see this as a growth area for the U.S. and investors all across the world.”
The numbers back Nawrocki up. CME Group’s Sector Index suite has seen average daily volume (ADV) surge to roughly 18,000 contracts in 2023, up from 14,000 in 2020. In that same time span, open interest (OI) has leapt to around 234,000 contracts, up from 150,000.
Late last year, the derivatives marketplace introduced six new E-mini Sector Index futures to give clients the chance to leverage strategies in regional banks, insurance, oil and gas production, semiconductors, retail and biotech.
‘Incredible Innovation’
CME Group also rolled out derived block trading*, which allows contract blocks to be privately negotiated, facilitating high volume trades with their price and quantity depending on the hedging of a related market. In just over six months since launched, these products have accumulated a volume of nearly 375,000 contracts.
The new functionality is a welcome innovation that Nawrocki believes will boost cross-asset trading volumes.
“This particular way to execute is an incredible innovation that’s extremely relevant because clients are used to trading sectors by trading a basket of underlying shares, which is what the end-block price is actually derived from,” he explained. “A client would typically come to BNP Paribas and ask for an execution in underlying securities, either through a VWAP (volume-weighted average price) over the day, or TWAP (time-weighted average price), or whatever their preferred way of executing is.
“Then we block the future using that as a reference price. In the end, the client gets a futures execution and all the advantages of having a futures position, but with a price that’s derived from the cash underlying it.
“Thanks to this innovation, I think volumes will grow over time across all sectors,” Nawrocki concluded.
*All block trades are subject to the requirements of Exchange Rule 526. Please review the Rule 526 MRAN for more information.