Johan Ericson Thordenberg och Martin Nilsson
presenterar sitt examensarbete

Exchange-traded funds and portfolio insurance strategies



Abstract

During the last years the mutual fund industry has seen a polarization
towards passive and active nancial product. Exchange-traded funds
(ETF) are one of the passive instruments that an increased number of
investors are acquiring.  An Exchange-traded fund gives the
opportunity to trade an entire portfolio in a single trade. They are
basically traditional open-ended mutual funds with the behavior of a
stock. ETFs trade intra-daily on a stock exchange with bid-ask spreads
and it's possible for investors to short, margin purchase and lend ETF
shares.  Most ETFs are passive funds that track certain indices. ETFs
can be organized to invest in any of these market segments,
categories, and investment styles. Today investors can use ETFs to
cover all the sectors, styles and market capitalization options
associated with ordinary mutual fund investments.  Our focus has been
to research and analyze the benets and disadvantages of ETFs. We have
also analyzed the possibilities of using ETFs in portfolio insurance
strategies.  In theory, we explain the basic ideas of the Option Based
Portfolio Insurance (OBPI) and Constant Proportion Portfolio Insurance
(CPPI). Analysis of three dierent types of CPPI solutions is further
investigated. Our measurements support a wide utility of portfolio
insurance both in aggressive and risk-adverse environments. In our
research and analysis we support with great enthusiasm portfolio
insurance and the use of ETF as underlying risk-full assets. A
creative manager could easily reallocate from dierent countries,
sectors and indices when using ETFs in their portfolio insurance
strategy. We see great potential in creating dierent styles of
portfolio insurance funds by using ETFs.