ETFs are probably the first index-based investment option that comes to mind when many investors think about the trend toward passive investing. And that’s fair considering ETFs have garnered most of the assets and headlines among passive options lately. What’s overlooked or underappreciated is the vast array of other investment options built around indexes and how many different firms work together collaboratively to bring these investment options to a wide range of investors.
After the first index mutual fund was introduced in 1975, it was evident that indexes could be used as the basis for other investment vehicles as well. The first index futures contracts were created in 1982, the first index options in 1983, and the first index ETF in 1990. These types of products are generally available on exchanges, but it is important to recognize that there are also a number of vehicles available off-exchange, as well. Index-linked swaps, insurance accounts, structured products, and collective investment trusts are additional examples of over-the-counter (OTC) products available from a range of providers. Each vehicle has unique characteristics that enable investors to achieve their desired objectives.
The delivery of these products is made possible by a network of firms partnering in various ways. One of the most popular indexes used for product development, the Russell 2000® Index, provides us with a great example. Since 1984, index users have widely embraced the Russell 2000 Index, making it the most followed US small cap index in the US institutional marketplace. An entire ecosystem of investable product offerings has developed using the Russell 2000 Index as a basis, including:
- Mutual funds
- Market cap ETFs
- Smart beta ETFs
- Leveraged/inverse ETFs
- VIX small cap volatility index
- ETF options
- Volatility options
- Cash options
- ETF futures
- Options on Index Futures
- Collective investment funds (CIF)
- Customized index portfolios
- Structured products
Cross-pollination among a range of firms has created a suite of products around a single index that represents more than $5 trillion in of funds under management for a wide swath of investors from retail retirement investors through the most sophisticated traders and asset management firms in the world. From just this one index, more than 500 firms offer products benchmarked to the Russell 2000 Index.
Investment products derived from a variety of FTSE Russell indexes trade on different exchanges around the world thanks to the close collaboration of partner firms. Partnerships among product sponsors, exchanges and index providers give investors access to a wide range of products, all derived from indexes. For example, multiple ETFs based on the Russell 2000 trade on different exchanges as well as a variety of futures and options. Investors can trade Russell 2000 Volatility IndexSM Futures (RVXSM), a key measure of expectations of near-term market volatility, or Russell 2000 cash options on the CBOE. They can also trade E-mini® Russell 2000® Index Futures and Options on Russell Futures – the complement to CBOE’s cash options – on the CME. Looking globally, solutions based on FTSE Russell indexes trade around the world. Futures and options on the FTSE China A50 trade on the Singapore Exchange and FTSE 100 Index Futures trade on the LIFFE in London.
While there is competition among our partners, there is also industry collaboration and a shared goal to grow the volume and open interest in products based on the Russell 2000 Index. All of this is beneficial to the investor and trader communities. Indexes form the basis of products that have become a critical element in implementing strategic and tactical investment decisions for active and passive investors alike. This ecosystem took time to grow and has successfully evolved to serve the changing needs of the marketplace. We continue to see opportunities for the ecosystem to thrive as markets and regulations respond to new technology and investment thinking.
Data as of December 31, 2016 as reported on March 31, 2017 by eVestment for institutional assets, Morningstar for retail mutual funds, insurance products, and ETFs, and additional passive assets directly collected by FTSE Russell. AUM data includes blended benchmarks and excludes futures and options. Passive assets directly collected by FTSE Russell have been removed from third party sources to prevent double counting. No assurances are given by FTSE Russell as to the accuracy of the data.
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No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
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Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.