Performance and diversification benefits of foreign-equity ETFs in emerging markets

This study provides a comprehensive review of the risk-return characteristics, performance and international diversification benefits of an uncharted fast-growing segment of the global exchange-traded fund (ETF) market by examining 17 foreign-equity ETFs traded in 6 emerging markets. The results indicate that the sample ETFs domiciled in these economies perform poorly providing relatively low returns while exposing emerging market investors to substantial total and systematic risks. In addition, these ETFs are found to be more sensitive to downside risk, making them relatively more vulnerable to market downturns. Although the foreign-equity ETFs are designed to provide investors with full international diversification benefits, we find that they are significantly affected by their local market conditions and sentiments, making them ineffective international diversification tools.