OhNoNotimAgain wrote:Even at the big index funds someone has to make a decision on when to use derivatives (which they use a lot) how close to full replication do they go, (none of them hold all the stocks in the index)
No, some index funds do hold every share in an index. It's not that hard to do for a fund tracking the FTSE-100 or the S&P 500, for instance.
I would not say that index funds and ETFs use derivatives "a lot". Some use only derivatives, some use them partially for specific purposes, and some do not use them at all. They make the most sense for ETNs and commodity ETFs, and the least sense for basic trackers of the major indices.
Moreover you say that like using derivatives is somehow bad, wrong or risky. Again, not the case. Derivatives can be used to reduce risk as well as increase it. In fact, in any derivatives trade one of the two parties involved is reducing risk.
You should also distinguish between derivatives that have credit and settlement risk, i.e. over-the-counter derivatives like swaps, and exchange-traded derivatives like options and futures.