For European ETF: 1.) Depends on the ETF. There is a) Full Replication. All stocks are 1 to 1 in the ETF. b) Swap based. EU swap ETFs can have up to 10% (but

For European ETF: 1.) Depends on the ETF. There is a) Full Replication. All stocks are 1 to 1 in the ETF. b) Swap based. EU swap ETFs can have up to 10% (but not more) in swap (what you mean by option/hedge), the rest is stocks. Oftentimes ETF issuers have an insurance on those swaps. If the swap counterparty goes bankrupt you loose that 10%. c) optimized sampling. You have different stocks (or not all of that index) in your ETF. The idea is to find stocks that corelate closely to those in the index. 2.) By buying the ETF you "own" the stocks. ETF are regulated like mutual funds (at least in EU). 3.) ETF are only a small fraction of the worldwide trade. But obviously if your company gets into a popular index (s&p 500) you can be quite happy. 4.) If everybody would only invest in indices, the market won't play anymore and it would be smarter to buy individual stocks again. This is the index investing paradox. But very unlikely to happen.