International diversification through iShares and their rivals

ABSTRACT This paper examines the diversification benefits of iShares in comparison with closed-end country funds and American depositary receipts between April 1996 and December 2013. iShares are country-specific exchange-traded funds that track specific Morgan Stanley Capital International country indexes, and thus are expected to provide diversification gains that are superior to their rivals. Our main findings are as follows. First, although all of these financial instruments are significantly exposed to the US market, they retain significant exposure to their home markets and provide important diversification benefits. Second, mean-variance spanning and Sharpe ratio test results provide strong evidence that iShares can neither outperform nor replace closed-end country funds and American depositary receipts for international diversification. Finally, a combination of these domestically traded securities could exhaust the gains from unattainable direct foreign investment.