Evaluating Investor Outcomes when Accessing
Equity Indexes through Derivatives and ETFs: An
Update

Abstract

When seeking to replicate the performance of an equity index, investment vehicle selection can heavily influence an investor’s outcome. In this article, the authors consider recent performance outcomes for beta investors employing both derivative and exchange-traded fund (ETF) vehicles for index replication. They find that, although end-user positioning has always been a driver of derivative pricing, this element has grown in influence. Similar dynamics apply to equity swaps, as both futures and swaps markets have common fundamental drivers: supply/demand pressures and leverage. The authors propose a vehicle selection framework, based on a quantitative assessment, that could help investors measure the precision of index replication.

TOPICS: Exchange-traded funds and applications, derivatives, portfolio construction