Credit Index Futures: U.S. interest grows on efficiency gains

Iris: Across the U.S. buy-side, I am seeing more investors, from macro funds to credit desks, exploring Credit Index Futures as part of their exposure or hedging toolkit. At a broader level, how do you see credit futures fitting into the US IG and HY landscape?

Mayank: Credit Index Futures can enable investors to get exposure to popular Bloomberg credit indices, without having to fund their entire position via cash upfront. They can be used by anyone looking to hedge their credit exposure, whether that comes from a cash or derivatives position. The futures are also a good substitute for cash bonds in any portfolio, potentially reducing balance sheet funding costs and allowing for better leverage.

Iris: Yes, balance sheet sensitivity is one of the most common themes I hear in my discussions. Given that so many U.S. investors use credit ETFs, how do they typically compare with futures as an investment tool?

Mayank: The main considerations where futures compare favorably are balance sheet funding and the expense ratios charged by ETFs. However, investors should also consider the implied funding cost embedded in futures prices when holding long positions, as, unlike ETFs, futures are unfunded. ETFs may realize tracking error versus the index, as the basket may not be an exact replication of the index, while Credit Index Futures prices expire exactly at the index value. Unlike ETFs, futures do not charge an expense ratio, but investors should factor in execution and roll costs when positions are rolled quarterly.

Another aspect to consider is that the short stock rate on ETFs can vary day to day, while the implied rate based on the futures price can be effectively locked in until the futures expiration at the time of the trade. This is particularly relevant for investors that face constraints in short-selling ETFs.

Iris: Short stock rate volatility is another topic I hear about frequently from clients once they start comparing ETF and futures trades side by side. Investors will usually incorporate Credit Index Futures into overlays as a first practical step toward adoption.

Mayank: If someone is looking to sell credit exposure, futures can potentially be a better option because of the day-to-day variation in the short stock rates of ETFs. If a trader is looking to buy credit but is also sensitive to balance sheet funding, then buying the futures is a better option than buying ETFs.

Iris: Another topic that I hear a lot about is Credit Index Futures versus CDX – something that almost every U.S. investor asks me about. What is your view of the trade-offs to consider when choosing between the two?

Mayank: CDX is based on Markit indices. It is equally weighted across different companies, for both HY and IG exposure. CDX tracks the CDS of multiple companies, not a specific bond. While similar, its performance is not identical to that of the underlying cash bonds. The performance of cash bonds in the index is what determines the index price that the futures track and expire against. A total return future will potentially track the exposure of cash bonds or ETFs better than other hedges, such as CDX. This is particularly the case if the composition of the portfolio that a market participant is trying to hedge is based on the Bloomberg credit indices.

Iris: Finally, I just wanted to highlight that during the recent geopolitical volatility, Eurex Credit Index Futures held up extremely well with strong volumes and a highly active block market. It showed there’s real two-way liquidity in the product when markets get stressed.

Conclusion

As more U.S. investors explore ways to manage their credit exposure more efficiently, Credit Index Futures are becoming a meaningful tool to complement cash bonds, ETFs and CDX. The conversations we have with market participants show a clear trend: investors are seeking tools that balance tracking quality, funding efficiency, liquidity, and operational simplicity across their credit exposures.

At Eurex, we support that evolution with a global Credit Index Futures suite, offering exposure across EUR IG and EUR HY, USD IG and USD HY, GBP IG and USD EM. All products are CFTC-approved.  All of these products are traded and cleared at Eurex, giving U.S. buy-side clients seamless access across regions and maturities.

Through portfolio margining via Eurex Clearing’s Prisma framework, investors can benefit from meaningful offsets across listed Credit Index Futures and listed fixed income derivatives. This brings together global access, margin efficiency and transparency, helping U.S. investors manage credit exposure more effectively across portfolios.