Derivatives on the Dow Jones industrial average aren't likely to be embraced by institutional investors, although retail investors may be willing to bite.
But the derivatives themselves may not flourish if institutions don't use the planned futures and options, which will be traded at the Chicago Board of Trade and the Chicago Board Options Exchange.
"I think that there probably will not be institutional demand for the Dow futures," said Robert Arnott, president and chief executive officer of First Quadrant Corp., Pasadena, Calif. Most plan sponsors use the Standard & Poor's 500 Index or the Wilshire 5000. "The Dow is not used by any institutional (plan) sponsor that I am aware of," he said.
In order for a futures contract to succeed, you need two things - institutional demand and the ability to arbitrage, he said. The Dow contracts have just one of those, making success less likely, Mr. Arnott said.
"I wish I could be more encouraging, because I'm a big advocate of diversity of choice in futures and options instruments," he said.
Likewise, John O'Brien, chairman and chief executive of money manager Leland O'Brien Rubinstein Associates Inc., Los Angeles, said the usefulness of Dow derivatives for institutions isn't great. But he said demand could come from retail investors, either through the American Stock Exchange funds based on the Dow, or through mutual funds that are created based on the Dow.