Proceedings

Compared with the ETFs, the options on indexes have the advantage of investing in
the first place a small capital, limited to the bonus paid and also having an ex-ante
determined risk. The buyer cannot lose more than the price of the option or of the
bonus paid if the stock exchange index is not evolving accordingly to the expectation.
It has to be mentioned that the options on the indexes S&P 500 are among the most
popular ones, along with those on Dow Jones Industrial Average Index Options or
Nasdaq 100 Index Options.
The apparition of ETFs made it possible for combined products as the options on
ETFs to come into being. The differences between the options on indexes and those
on ETFs are numerous. The most important is that while the options on ETFs are
finalized with the delivery of ETF units, the options on indexes are liquidated through
compensation, namely through the payment in cash of the differences between the
price of the contract and the price of the support asset at due time. Also, by being of
America style, the options on ETFs can be exercised at any given moment before due
time, while the options on indexes (European style) can be exercised only at due time.
One of the reasons of an accelerated growth of the ETFs in respect to other
instruments refers to the fact that while the futures, swaps or options contracts are
classified as derivatives, the ETFs are instruments that are more secure (fully funded).
In a period where the cautions attitude of investors and the increased wish for
protection against risk dominate the market, the ETFs have gained an important place
especially among the middle size and conservative investors. Still, in the case of ETFs
the costs are known ex-ante while in the case of futures the spreads are not known
until the moment when they occur. The simplicity of ETFs transactions is not
comparable to the management of the margin or the documentation of the swap,
making the investors accept a higher cost for the ETFs.
Even if they are preferred many times over other investment alternatives, as in the
case of any other financial instrument, the investors in ETFs must take into account
also the potential risks. Beside the market risk, the counterparty risk and the liquidity
risk that we can find also in the case of other investment funds, the ETFs present a
specific risk as there are cases when their performance doesn’t follow the
performance of the index. In this case, the difference between the performance of the
ETF and that of the index it follows is named tracking error.
According to a study performed by Morgan Stanley, the tracking-error associated to
the ETFs registered an important increase in 2009, factors as the market’s volatility,
diversification demands, the optimization strategies and the capital fluctuations in the
companies with reduced capitalization contributed at the ETFs failure to reach the
performance of the benchmark. If in 2008 the tracking error associated to the ETFs
listed on the American markets was of only 0.52%, in 2009 it reached 1.25%. For
example, iShares MSCI Emerging Markets Index obtained in 2009 a profitability of
71.8% while the reference index registered 6.7% more, namely 78.5%. We must
accept that some funds of the American market, such as style ETFs, have registered
surprisingly performances, while the sector ones, on merchandise and with fixed
income are left behind in respect to the benchmark.
Even if holding ETFs is not risk free, the institutional investors, especially the
European ones where the retail sector is still developing, use these products more and
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