Does it Pay to Diversify - U.S. vs. International ETFs?

Posted: 1 May 2015 Last revised: 17 Dec 2015

See all articles by Srinidhi Kanuri

Srinidhi Kanuri

University of Southern Mississippi; University of Southern Mississippi

Robert W. McLeod

University of Alabama

Date Written: April 28, 2015

Abstract

This article evaluates the performance and diversification benefits of international ETFs for U.S. investors during and after the recent financial crisis. Our results show that U.S. ETFs outperformed all categories of international ETFs for the period of our study (January 2008-June 2013); they have higher average monthly returns, lower risk (standard deviation of returns), higher risk-adjusted performance (Sharpe, Sortino, and Treynor ratios) and the highest cumulative returns over the entire period. When we form equally weighted portfolios of each ETF category and compute their risk-adjusted performance, we again find that U.S. ETF portfolios had the best performance for the entire period. We also find that U.S. ETFs have the lowest tracking error during the entire period. Most of these ETFs passively track the benchmark and do not manage for positive alpha. Previous research has questioned the diversification benefits of international investing during times of financial distress. We find that international ETFs are highly dependent on major U.S. indices during the period of our analysis, and therefore, offered limited diversification benefits for U.S. investors.

JEL Classification: G11, G12, G15

Suggested Citation

Kanuri, Srinidhi and Kanuri, Srinidhi and McLeod, Robert W., Does it Pay to Diversify - U.S. vs. International ETFs? (April 28, 2015). Financial Services Review, Vol. 24 No. 3, Available at SSRN: https://ssrn.com/abstract=2600282

Srinidhi Kanuri

University of Southern Mississippi ( email )

Joseph Greene Hall (JGH), 3114,
118 college Drive, #5076
Hattiesburg, MS 39406
United States

University of Southern Mississippi ( email )

Hattiesburg, MS 39406
United States

Robert W. McLeod (Contact Author)

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8993 (Phone)
205-348-0590 (Fax)

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