Return Orthogonality and True Diversification Benefits of BRIC Securities

Abstract

In this study, the author examines and compares the US market risk exposure and true diversification benefits of emerging markets closed-end funds and exchange-traded funds. The author uses a two-factor econometric model and orthogonal returns to isolate both, US direct market risk and true diversification. Results show that exchange-traded funds that invest in emerging markets are a better vehicle for US-based investors to gain international diversification. In comparison to closed-end funds, exchange-traded funds provide truer international diversification and have less exposure to US market risk. TOPICS: Mutual fund performance, exchange-traded funds and applications