On September 18, 2020 you were hired to manage a $100 million S&P 500 index fund for a U.S. pension fund for 365 days.* Table 1 provides fee and transaction cost information.**

Table 1

ETF Price = 335.7

ETF Management Fee = 5 bps/yr

ETF Commission = 1.0 bps

ETF Estimated Execution Shortfall = 10 bps

Futures Commissions = 0.4 bps per quarter

Futures Execution Shortfall at Initiation = 5 bps

Execution Shortfall on Calendar Spreads = 0

Table 2 provides S&P 500 futures pricing information.

Table 2

S&P 500 Index = 3,357

December 2020 S&P 500 Futures Price = 3,349

March 2021 S&P 500 Futures Price = 3,339

Days until December expiry = 91

Days until March expiry = 182

Dividend Yield thru December = 1.65% per annum

Dividend Yield thru March = 1.66% per annum

LIBOR thru December = 0.25% per annum

LIBOR thru March = 0.25% per annum

*To be more precise, assume your assignment ends at the expiration of the September

2021 S&P 500 Futures contract, and you are holding the position for 365 days.

**Since you may hold the position for more than 365 days, you can ignore

transaction costs to unwind the position.

If you are able to invest cash at LIBOR + 25 bps per annum, would you prefer futures or ETFs as your way to obtain S&P 500 index exposures?

Please demonstrate precisely why.

Please assume that the calendar spread mispricing between March 2021 and June 2021 and June 2021 and September 2021 will be the same as the calendar spread mispricing between December 2020 and March 2021.