Dissertation/Thesis Abstract

Examining the Potential Diversification Benefits of Emerging Market Exchange-Traded Funds
by Bernstein, Betty, D.B.A., Northcentral University, 2012, 123; 3533665
Abstract (Summary)

Practitioners and academics believe holding a diversified portfolio provides investors a higher rate of return and a lower level of risk. Researchers studying portfolio diversification utilize broad market indices of each country to evaluate potential diversification benefits. These market indices are not securitized, cannot be traded, and are not actual returns that investors would receive. Exchange-traded funds (ETFs) provide investors with an opportunity to buy securitized market indices, but minimal scholarly research currently exists regarding portfolio diversification using emerging market ETFs. ETFs are U.S. securities traded on the U.S. markets, which may expose the ETF returns to U.S. market risk. The research problem this study addressed was the lack of ability of emerging market ETFs to add value to a portfolio. The purpose of this quantitative correlational and comparative study was to investigate investors' potential diversification benefits from adding country-specific emerging market ETFs to a domestically diversified portfolio. The emerging market ETFs examined by this study were iShares MSCI Brazil Index, iShares FTSE China 25 Index, iShares MSCI Malaysia Index, iShares MSCI Mexico Index, iShares MSCI South Africa Index, iShares MSCI South Korea Index, and iShares MSCI Taiwan Index. Significant correlations were found between emerging market ETF returns and the S&P 500, corresponding country indices, and emerging market ETF returns based on the NAV of the ETF. The Sharpe ratio of the S&P 500 was not significantly different than the Shame ratios of optimized portfolios containing both the S&P 500 and emerging market iShares China, t(1510) = 1.884, p > .05, Malaysia, t(1510) = 1.954, p > .05, South Africa, t(1510) = 1.759, p > .05, South Korea, t(1510) = 1.661, p > .05, or Taiwan, t(1510) = 1.008, p > .05, indicating investors would not benefit from the addition of these ETFs. The Sharpe ratio of the S&P 500 was significantly less than the Sharpe ratios of optimized portfolios containing both the S&P 500 and emerging market iShares Brazil, t(1510) = 2.480, p < .05, or Mexico, t(1510) = 2.265, p < .05, indicating investors would benefit from the addition of these ETFs. Recommendations for future research include examining the diversification benefits of other emerging market ETFs and the potential diversification benefits of adding two or more emerging market ETFs to an investor's portfolio.

Indexing (document details)
Advisor: Nguyen, Trent
School: Northcentral University
School Location: United States -- Arizona
Source: DAI-A 74/04(E), Dissertation Abstracts International
Subjects: Finance
Keywords: Diversification, Emerging markets, Exchange-traded funds, Investment, Portfolio
Publication Number: 3533665
ISBN: 978-1-267-78181-9
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