Demands for holding and trading risk via broad market portfolios grew tremendously over the last twenty years. To meet these demands at low cost, several holding instruments and trading methods were created. These include open- and closed-end index funds, warehouse receipts, stock index futures, stock index options, index participations (IPS), program trading, package trading and portfolio insurance.
This article considers the factors that will affect investor acceptance of cash index alternatives. The results suggest that warehouse receipts and securitized open-end index funds (funds that can be continuously traded in secondary markets) will be the most successful new instruments. They can provide good index risk replication at low cost in a liquid form. The article then considers how markets would affected by widespread use of these new instruments. A decrease in transaction-induced volatility may be the most important social benefit.
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Last revised 8/5/96.