Why stay-at-home investing makes sense

Abstract

Despite the benefits of international diversification investors continue to display a preference for home based investments. Given this preference we investigate whether it is possible to mimic the benefits of international diversification via domestically traded products. We test this from the perspective of US investors for 37 countries between 1996 and 2011. We seek to replicate the equity index of each country with domestically traded US products such as industry indices, Multinational Corporations, American Depository Receipts, single country iShares ETFs and Closed-End Country Funds to investigate whether the benefits of international diversification can be exhausted domestically. While the benefits of investing overseas vary significantly across sub-periods, portfolios of US-traded products can replicate 36 of the 37 foreign country indices. These findings are robust to variance in the performance and volatility of the US market relative to other markets. US investors do not need to invest overseas to reap the benefits of international diversification.