Trading the Equity/Future Spread

/Trading the Equity/Future Spread

Trading the Equity/Future Spread

By | 2017-08-18T16:54:26+00:00 June 24th, 2013|Research Insights|1 Comment

Dividend swaps as synthetic equity


This paper asks the question: Can equity exposure be replaced by a dividend swap? The question is motivated by the observation that an equity contract is essentially a sequence of floating dividends exchanged for a fixed price. A fixed maturity dividend swap – paying or receiving dividends against a fixed swap rate – is closely related. The difference is that a dividend swap with a fixed maturity is only determined by some of the future dividend payments rather than all of them. From this perspective it seems plausible that an investment in an equity can be replaced by a dividend swap. We argue that this is the case and further that the dividend swap has several characteristics which make it more desirable than cash equities in some instances. The arbitrage and pricing theory to construct dividend swaps is developed and several possible trading strategies are explored. An example uses data on the EuroStoxx 50 to construct dividend swap rates and realized dividend rates and calculates the performance of the swaps from January 2000 to September 2012. For all maturities tested (1-5 months) the performance was substantially better than the underlying index.

Data Sources:


Alpha Highlight:

Simply going long equity and short a future looks good. Shorting a longer dated future (5 months) looks even better.


The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Strategy Summary:

  1. Construct a dividend swap by holding an equity against a short future.
    • The best results in the paper are found by using a 5 month future.
  2. Paper uses EuroStoxx50 Index to create the swaps.
    • Spot Index SX5E and Total Return Index SX5T.
    • 5-month swap mean return is 1.1% as is shown in Table 4.
      • Results for other swaps (1 month, 2 month, 3 month, and 4 month) are also shown in the paper.


  • Paper claims this swap outperforms the index, but does not show the index return over the same time period.
    • Would be nice to see returns for other swaps as well.
  • Interesting paper, but more details would be nice–reconstructing the results is not straight forward.

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About the Author:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

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