The substitution between financial innovations, exchange-traded funds (ETFs), and stock index derivatives (i.e. index financial instruments) is one of the relatively understudied topics of the financial sciences. The current study aims to verify empirically the diffusion and substitution of ETFs in the market for index financial instruments. It presents in-depth analysis of the development of index financial instruments traded on the stock exchanges in two key Asian economies: Japan and South Korea. The development of the ETF markets (i.e. diffusion of ETFs) was confirmed for both countries. Moreover, through the technological substitution analysis, we confirmed the process of gradual substitution between stock index options and ETFs, with the increasing role of the innovative products noticeable in some periods (the empirical study used monthly data for 2003–2015). Additionally, we verified empirically the linkages between information and communication technologies (ICTs) penetration and the diffusion of ETFs in Japan and South Korea, using extended dataset for 2004–2019 and applying country-specific regression models. We found that increases in ICT are associated with the growing market share of ETFs in both countries.