Equity Index Carry

An equity index future's price is tied to the spot index by a simple no-arbitrage relationship: the future should trade at roughly the spot price plus financing cost minus expected dividends, since a trader could otherwise borrow money, buy the underlying stocks, collect the dividends, and replicate the future's payoff for less (or more) than the future's actual price. Equity index carry is exactly this financing-minus-dividend gap made explicit: it's the return earned from holding a long index future position purely from the passage of time, before any change in the index level itself.

When the dividend yield on the index exceeds the financing (risk-free) rate, the future trades at a discount to spot and rolls upward toward spot as expiry approaches — positive carry for a long futures position. When financing costs exceed the dividend yield, the reverse holds: carry is negative, and a long future loses value relative to spot purely from the roll, even with the index flat. This carry differential moves with interest-rate cycles: it tends to be strongly positive in low-rate, high-dividend-yield environments and can turn negative when rates rise sharply while dividend yields stay comparatively low.

With a 2% dividend yield and a 1% financing rate, a long index future carries roughly $2\% - 1\% = 1\%$ per year purely from the yield-versus-financing gap, separate from and additive to any actual index price appreciation.