Why Stay-at-Home Investing Makes Sense

Abstract

Despite the benefits of international diversification, investors continue to display a preference for home-based investments. Given this preference, we investigate whether it is possible to mimic the benefits of international diversification via domestically traded products. We test this from the perspective of US investors for 37 countries between 1996 and 2011. We attempt to replicate the equity index of each country with domestically-traded US products such as Industry Indices, Multinational Corporations, American Depository Receipts, Closed-End Country Funds and iShares to investigate whether the benefits of international diversification can be exhausted domestically. While the benefits of international diversification vary significantly across sub-periods, portfolios which include all of the US products can replicate almost all of the foreign country indices in periods of both under- and over-performance of the US market. US investors do not need to invest overseas to reap the benefits of international diversification.