25.3 The Round-Trip Cost of Trading Index Futures ■ Price Impact D Spread □ Commissions & Fees Futures Million in Physical Stocks versus Stock instruments used to calculate the benchmark. The additional tracking error derives from three sources. First, futures do not exist in all countries and asset classes. Second, existing futures have been created for the most popular local indexes of large stocks, but these indexes often do not coincide with the indexes used by institutions in their global portfolios. Third, even if a futures contract exists on the very index used in the benchmark, the futures contract does not track the underlying index perfectly due to short-term mispricing between the two as well as differences in tax treatment that can be significant in some countries. This tracking error is termed basis risk. In spite of these issues, a completion portfolio of futures and forwards generally tracks a global multi-asset-class benchmark quite well. In Table 25.3, we show a recent snapshot of the completion portfolio for one of our existing clients. After incorporating all three sources of completion error described earlier, the projected tracking error on the completion portfolio is only 0.45 percent, which compares favorably to the tracking error of 2.18 percent before completion. These arguments strongly favor the use of liquid derivatives to implement GTAA, but the strategy may also be implemented using cash instruments, with a natural reduction in efficacy. For example, it is common in some countries for institutions to use so-called "swing" portfolios. A swing portfolio generally requires 10 percent or more of the institution's overall portfolio and is invested entirely in passive underlying funds. The manager of the swing portfolio then reallocates capital among these funds to effect an overall asset allocation. The availability of index funds, the cost of trading them, and the size of the swing portfolio all determine the degree to which the GTAA process would be constrained and the performance would be reduced.