Expanding a U.S. portfolio internationally
ADRs, their underlying assets, and ETFs
DOI:
https://doi.org/10.61190/fsr.v19i2.4971Keywords:
International diversification, Portfolio management, ETFs, Underlying assets, ADRsAbstract
We investigate if constructed portfolios of ADRs from six countries provide a useful vehicle for international diversification in the Markowitz sense for U.S. investors and if those diversification gains differ from the results obtained from matched portfolios of the underlying assets (UAs). We analyze 280 ADRs and their matched UAs, and consider ETFs as benchmarks. We find that investors in U.S. equities benefit from allocation towards U.S. bonds and ADRs or their UAs. The best diversification benefits are obtained by directly investing in the constructed UA portfolios rather than the constructed ADR portfolios or ETFs. The results are consistent across levels of risk-aversion and do not change when considering several rebalancing strategies, subperiods, or more realistic fixed asset allocations or market capitalization weights. A discussion with respect to possible implications of transaction costs is provided. The return-to-risk benefits of the UAs over ADRs support the strategy of investing directly in foreign equities to construct an investor's globally diversified portfolio.
Downloads
Published
Issue
Section
License
Copyright (c) 2010 Academy of Financial Services
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.
This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.
