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MICRO NYSE FANG+ Index Futures

Advantages to the index vs. the individual stocks

MICRO NYSE FANG+ Index futures (“MICRO FANG+ Futures”) trade actively on ICE Futures U.S. The underlying NYSE FANG+ Index, constructed by ICE Data Indices, LLC consists of 10 highly-traded growth stocks of technology and tech-enabled companies.

The NYSE FANG+ Index currently includes the five FAANG stocks along with Microsoft, Tesla, Nvidia, Snow, and AMD.

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The strong growth of these and other leading tech stocks have been a key factor of the market’s performance in recent years. The 10 components in the NYSE FANG+ Index are all actively traded and widely followed by a variety of market participants, ranging from individual traders to institutional portfolio managers.

MICRO FANG+ Futures can provide a direct and efficient way to trade underlying components along with their equity markets activity or as a substitute for trading the individual stocks.

Here are some of the advantages of trading MICRO FANG+ Futures:

Smaller contract size and margin requirements

To make the contract more accessible for all participants, the size of the MICRO FANG+ Futures contract was reduced in September 2020. The unit of trading is now $5.00 times the NYSE FANG+ Index (price return version) and the current notional value of the futures contract is approximately $24,500 (December 2022).

This contract size allows a variety of market participants, such as individual traders, investors and asset managers, to easily access and trade the product.

The margin requirement for MICRO FANG+ Futures is significantly less than the margin requirements for a number of other index products with larger multipliers, providing capital efficiency and accessibility for traders and investors. Initial margin is typically about 8.5% of the notional value of the contract, or about $2,100 per contract. Another potential benefit is that ICE Clear U.S. accepts Treasury securities to meet initial margin requirements.

Equal weighting

The index is equally weighted and rebalanced on a quarterly basis with each component stock set at a 10% weighting. Equal weighting allows for a more diversified and less concentrated portfolio relative to market cap weighted indexes. This methodology can provide traders the ability to take advantage of and focus on speculative and trading opportunities involving the underlying NYSE FANG+ Index stocks.

For example, traders who have a strong directional bias on the short-term direction of the NYSE FANG+ Index components can buy or sell the futures contract and directly target the individual NYSE FANG+ Index names.

Leveraged trading opportunity

The smaller MICRO FANG+ Futures contract size coupled with the attractive margin requirements allows traders to take a cost-efficient market view in these leading names. For example, with an initial margin of only about 8.5%, an investor is controlling a $24,500 portfolio and the ability to go long or short the entire index in one transaction.

This initial margin requirement is substantially less than the cost of buying the stocks outright or buying them under Federal Reserve Board Regulation T that allows for a 50% margin rate.

For example, if a trader was looking to invest $100,000 on the stocks comprising the NYSE FANG+ Index, they could buy the stocks and typically be required to finance 50% of the capital requirement under Regulation T. Alternatively, with the index at 4,900, they could buy 4 MICRO FANG+ Futures contracts (notional value of $24,500 per contract). The futures position would have a value of about $98,000 and would require $8,400 as a margin requirement. As noted above, Treasury securities can be used to meet initial margin requirement.

Further, assume that the $100,000 stock portfolio correlates closely with the NYSE FANG+ Index and both increase by 5%. The stock portfolio’s increase in value amounts to $5,000. The MICRO FANG+ futures position would increase by $4,900. However, this represents a return of 58% (given the $8,400 initial margin requirement) vs. the 5% return on the stock portfolio.

In short, one does not need to incur the costs and capital involved with buying the individual equities. The trader can gain exposure to a substantially greater value of stocks than they could by trading the individual issues. It needs to be stressed of course that leverage can also quickly work against a market participant if market expectations are not correct.

Transaction costs

Transaction costs involving selling and buying MICRO FANG+ Futures can be viewed as attractive; the total futures brokerage costs can vary but can be as low as 0.02% of the contract value.

Short selling may be efficient

Index futures contracts can provide the ability to buy or sell the underlying index without any restrictions. Hence, MICRO FANG+ Futures can provide a direct and efficient mechanism to obtain short exposure on the NYSE FANG+ Index component stocks.

By comparison, security regulations can make it difficult to short sell equities and requirements can vary with different individual stocks. A margin account with a broker is required and the process involves the trader borrowing shares from the broker. Further, certain issues can be hard to borrow which can make it relatively expensive or, in some cases, impossible to short sell a stock.

Possible tax advantages

MICRO FANG+ futures are Section 1256 contracts which receive blended 60/40 capital gains tax treatment. Participants can receive 60% long-term and 40% short term tax treatment on capital gains regardless of how long a NYSE FANG+ Futures position is held. This may benefit investors in the top tax bracket, as it can result in a blended rate of 27.8%, which is considerably less than the 39.6% top tax bracket for stocks that are held less than 12 months.

Pattern day trader rule

The pattern day trader rule stipulates that stock traders with less than $25,000 in their margin account cannot make more than four day trades in a rolling five-day period - futures trading is not subject to pattern day trading rules. Hence, MICRO FANG+ Futures and other futures market participants can trade actively on an intraday basis provided they meet their futures margin requirements. This flexibility has been a key factor in the strong growth and development of day trading activity that exists in the index markets.

Summary

MICRO FANG+ Index futures may provide advantages for traders. The index is designed to specifically target 10 of the highly-traded growth stocks of technology and tech-enabled companies and the related tech stocks sector. The futures contract has been sized in a way that can provide significant cost margin/leverage benefits vs. trading the underlying stocks.

NYSE MICRO FANG+ INDEX Contract Specifications

Commodity CodeFNG
Contract Size$5 times the NYSE FANG+ Index
Contract Series4 contracts in the March, June, September and December cycle
Price QuotationIndex points, to two decimal places
Tick Size20 Index points, equal to $1.00 per contract; calendar spread trades may be executed at .05 index point increments. (Block Trades can be done at .01 Index points)
Last Trading DayThird Friday of the expiration month. Trading in the expiring contract ceases at 9:30 a.m. ET on Last Trading Day.
Daily Settlement15:59 to 16:00 ET

This article is provided for informational purposes only. The information contained herein is subject to change without notice and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between Intercontinental Exchange, Inc., ICE Data Indices, LLC and/or any of its affiliates and their respective clients relating to any of the products or services described herein. This article may include observations made by Intercontinental Exchange, Inc., ICE Data Indices, LLC and/or any of its affiliates of general market movements and trends, but nothing herein is intended to be a solicitation or a recommendation to buy, sell or hold securities or futures contracts. Intercontinental Exchange, Inc., ICE Data Indices, LLC and/or its affiliates do not provide legal, tax, accounting, investment or other professional advice. Clients should consult with an attorney, tax, or accounting professional regarding any specific legal, tax, or accounting situation. Each Index provides a general investment strategy, does not take into account any of the specific needs or financial circumstances of any person, entity or group of persons and should not be considered investment advice. All information provided by Intercontinental Exchange, Inc., ICE Data Indices, LLC and/or its affiliates, including without limitation, any materials that describe any Index, is of general nature only.