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The international diversification benefits of U.S.‐traded equity products

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  • Martha O'Hagan‐Luff
  • Jenny Berrill

Abstract

The benefits of international diversification for equity investors have been highlighted for decades. Despite the reduction of many previous barriers to foreign investment, investors are found to persistently overweight domestic equities. This paper examines whether the benefits of international diversification are available via U.S.‐traded equity products over a 15‐year period between 1996 and 2011. The equity products investigated are multinational corporations (MNCs), American depository receipts (ADRs), single‐country exchange‐traded funds, iShares, and closed‐end country funds. Mean‐variance spanning tests and Sharpe ratio analysis reveal that portfolios of ADRs and MNCs offer the greatest international diversification benefits to U.S. investors in a domestic setting. Whereas the benefits of international diversification vary during periods of differing market conditions, the findings for ADRs and MNCs remain robust. We conclude that it is possible to reap the benefits of international diversification via U.S.‐traded equity products but that the benefits of different equity types vary significantly.

Suggested Citation

  • Martha O'Hagan‐Luff & Jenny Berrill, 2019. "The international diversification benefits of U.S.‐traded equity products," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 1238-1253, July.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:3:p:1238-1253
    DOI: 10.1002/ijfe.1714
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    Cited by:

    1. Migliavacca, Milena & Goodell, John W. & Paltrinieri, Andrea, 2023. "A bibliometric review of portfolio diversification literature," International Review of Financial Analysis, Elsevier, vol. 90(C).
    2. Yu, Xing & Zhang, Wei Guo & Liu, Yong Jun & Wang, Xinxin & Wang, Chao, 2020. "Hedging the exchange rate risk for international portfolios," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 173(C), pages 85-104.

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