MNQ Futures vs QQQ ETF | Which One Should You Trade

MNQ Futures VS Nasdaq 100 ETF | Which One Should You Trade?


The following article on MNQ Futures VS Nasdaq 100 ETF is the opinion of Optimus Futures.

Nasdaq futures vs Nasdaq etf

You want to trade the Nasdaq 100 index and have the choice of trading the Micro e-mini Nasdaq futures (MNQ) or the Invesco Nasdaq 100 ETF (QQQ). Both have the same underlying index, the Nasdaq Composite. So how different can they really be? Well, from an investment perspective they’re quite different. But from a trading perspective, we’re talking a “night and day” difference.

Sure, they’re correlated, as the Nasdaq Composite is the underlying index. But overall, they’re two separate instruments presenting different trading opportunities, liquidity profiles, trading hours, capital requirements, cost efficiencies, and tax treatments. That’s a bucket load of differences, and you may or may not realize what the implications are for your own trading.

So, let’s look at both MNQ and QQQ solely from a trader’s perspective.

Short-Term Trading Opportunities

You might be thinking that because both the MNQ and QQQ are pegged to the same index, both will provide you with the same type of short-term trading opportunities. In that case, you might want to overlay both charts on top of each other to see what these trading opportunities look like.

Take a look at the chart below, and you’ll see that a picture is worth a thousand words:

MNQ and QQQ Superimposed – 15-Minute Chart, February 11 to 19, 2020

Micro Nasdaq Futures VS Nasdaq 100 ETF

Notice the purple line with occasional flat spots? That’s the QQQ during the period before the stock market opening and after the stock market close.

See all that price volatility dancing above and below those flat lines? That’s the MNQ. For the Nasdaq futures, “Always on the move” It keeps moving. And if you’re trying to capture these volatile fluctuations, then it might be worth either staying up longer or getting up earlier to engage them on the MNQ.

So, might this make the MNQ a better instrument when it comes to seeking more (and more frequent) trading opportunities? Yes, and no. Clearly, there’s more movement in the Nasdaq futures vs the ETF. But there are other factors to consider, and we’ll cover those next.

Cost-Efficient Trading

Does it cost more to trade MNQ futures or the QQQ ETF?

In terms of costs, one share of QQQ at the current price of $193 per share will cost you, well…$193. One contract of the MNQ can cost you anywhere from $50 to $100. That’s day trading margin money, by the way. Margins are placed back in the account when you close the positions. However, you will pay commissions per futures contract.

The thing is that you’ll have to reserve $900 in “maintenance margin” in order to hold your positions overnight. But if you’re out before market close, even if you re-open your position after the close to continue day trading, then you’re only subject to the day trading margin of $50 to $100 (depending on your broker).

The Overnight margins are subject to change by the CME exchange.

But which one delivers “more bang for your buck”?

To answer this question, it helps to look at the “dollar per tick” value for both instruments.

  • One contract of the MNQ has a dollar-per-tick value of $0.50.
  • One share of the QQQ has a dollar-per-tick value of $0.01.
So, in order for your QQQ position to match one contract of the MNQ, you may need to buy $9,650 worth of shares (50 shares x current price of $193) in order to match one MNQ contract which you can trade for between $50 to $100.

That’s between 19,300% and 9,650% above the trading margin cost of one MNQ contract (plus commissions and exchange fees).

If you’re going to “trade” the Nasdaq 100 index, it might be more cost-efficient to trade the MNQ instead.

Minimum Balance Requirements for MNQ Futures vs QQQ

If you’re planning on day trading the Nasdaq index, know that the difference in minimum balance requirements vary greatly depending on whether you’re trading equity security or a futures contract.

To day trade the QQQ, you need to hold a minimum balance of $25,000 in your equities account. Falling under that balance can get you flagged for a violation. If you violate the rules more than once, your account may be frozen until you deposit the minimum required funds into your account.

Trading the MNQ, on the other hand, will require a margin of only $50 to $100 per contract (depending on the brokerage or clearing firm), and a maintenance margin of $900 per contract if you’re planning on holding your position beyond the market close. Something to really think about if you have a good amount of risk capital but not enough to maintain $25,000 in your account at all times.

Trading Around the Clock

We covered this somewhat in the first section on trading opportunities. But let’s approach it from a different perspective. In today’s financial environment, one that’s global, certain events taking place across the world can fundamentally affect US indexes like the Nasdaq.

For instance, changes in China’s monetary policy can affect Chinese companies that are part of the US tech supply chain.  When events such as these take place, traders around the world may take a position on the Nasdaq futures overnight, while the QQQ is inactive.

So, the only way to act on such opportunities or to take defensive measures (such as close out your position) is to trade during the overnight session, which is only possible through the futures market.

Take a look at the example below:

Micro Nasdaq Futures VS Nasdaq 100 ETF

Let’s suppose you trade the QQQ. Following the March 9 market tumble due to coronavirus fears, you were expecting a potential bounce at the 7,815.00 range. The problem is that the Nasdaq securities markets closed before the price ever reached that low (see the flat purple line).

Because you trade only the QQQ, your day ended at [1] before the Nasdaq hit support at [2]. An MNQ trader might have been able to exploit this bounce at around [3] after which followed a huge rally.

But you’re not trading the micro futures market. So, you decided to jump in when the QQQ reopened at [4], hoping for the rally to continue. Unfortunately, the upswing didn’t continue, at least for that morning, as the Nasdaq tumbled once again.

Which Instrument Might Complicate My Tax Situation?

Hardly anyone enjoys filing their taxes (except for account- or number-crunching-nerdy-types). That’s a given. So, when deciding between MNQ and QQQ, the question you want to ask yourself is “do I want to make my taxation experience simpler or more complicated?”.

Disclaimer: none of the following items include tax advice, but they do cover a few educational concepts to think about. Be sure to consult with a tax professional to get the most accurate and up-to-date advice on trading taxation.

Let’s start with the QQQ and assume you do something between day trading and swing trading. Let’s also assume you made around 100 trades over the course of a year, and you generated a net loss by the end of the year.

First, since you are trading a security, you may find yourself in a position where you have to list every single trade you made in order to determine your taxable status. Because you took a loss that year, you’re probably planning on filing a capital loss (or as investors call it, tax-loss harvesting). But wait a minute! You day traded many of these positions. And if you sold the QQQ at a loss only to buy it back at a lower price, then you just did a wash sale, meaning, you may not be able to write off your loss. In fact, you may have several wash sales–not good. As you can see, overall, this can create a real mess.

In contrast, trading the MNQ might present a simpler avenue. At the end of the year, no matter how many times you traded, you get a tax statement that provides you with one of two things: your net capital gain, or net capital loss. Simple. If you generated a profit, you are subject to capital gains tax. If you generated a loss, then you file a capital loss. This is one aspect of futures trading that can make end-of-year taxes a bit more bearable for active traders.

Can I Easily Get In and Out of a Position?

This question concerns liquidity and trading volume. The more an instrument is traded (trading volume), the more liquid it becomes. Hence, the easier it might be to get into and out of a position.

QQQ has been trading since 1999. That’s a long time. At the time of writing, the average 3-month trading volume stands at 41.48 Million. No wonder short-term traders like to trade it–there are often plenty of buyers and sellers to help you open or close a position!

MNQ, on the other hand, is a new instrument. It’s only been trading since May 2019. What’s its average trading volume? Well, it’s growing, but it appears to be under one million.

Below is an image of the March contract from the CME Group:

CME MNQ Volume Chart

So, what does this all mean? If you’re looking to scalp a few ticks from the Nasdaq index, then you might have an easier time doing that on the QQQ or even the NQ (E-mini Nasdaq futures) rather than the MNQ.

But if your profit target is wider, then the MNQ might prove favorable given the market conditions on any given day. QQQ is more liquid, yes, but liquidity is only one aspect that might make one instrument more favorable than another.

The Bottom Line

Ultimately, when deciding between the QQQ and MNQ, you’ll have to determine which opportunities and risks might suit your financial goals, trading strategy, capital resources, and risk tolerance. Although both instruments are pegged to the same underlying index, they have different liquidity profiles, trading hours, capital requirements, cost efficiencies, and tax treatments.

All these factors can make a big distinction in terms of opportunities and risks. So, choose wisely!

Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results.  This matter is intended as a solicitation to trade.

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