The International Diversification Benefits of US-traded Equity Products

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 US-traded equity products over a fifteen year period between 1996 and 2011. The equity products investigated are Multinational Corporations (MNCs), American Depository Receipts (ADRs) and 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 US investors in a domestic setting. While 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 US-traded equity products but that the benefits of different equity types vary significantly.