Country Exchange Traded Funds Research Articles

Risk, ambiguity, and equity premium: International evidence

We empirically examine the relation between risk, ambiguity, and market equity premium in 21 international stock markets. After estimating each country's degree of ambiguity from intraday data of iShares country ETFs (exchange-traded funds), we find a positive risk-return tradeoff. Investors' attitudes toward ambiguity is conditional on their expectations of probability of gains, but its relationship is nonlinear. This nonlinearity in ambiguity premium is more prominent in emerging markets. Additionally, we conduct a cross-country analysis, which shows that cross-country variations in cultural and institutional factors affect investors' behavior. Our international evidence supports that ambiguity alongside risk are the key determinants of investors' decision-making.

Integrated Global Asset Management: Quantitative Country ETF Trading Strategy

This paper unveils the processes for building a country’s trading strategy that can outperform the MSCI Indexes and on the factor basis. By exploring the belief and experimenting with the structure in place, there seems to be enough room to build a quantitative investment strategy that generates high-quality predictive signals (alphas) considering each countries’ expected equity and currency performances. We created, developed and deployed a set of systematic strategies which produces impressive returns using country Exchange-Traded Funds (ETFs) with the objective to generate returns, risk profiles, automations, modernizations, and optimizations to outperform the iShares MSCI ACWI ETF (ACWI) and the iShares MSCI ACWI ex US ETF (ACWX) and similar benchmarks and evidences within the industry based on extensive data, mathematical, market, and statistical analysis that we used in: 1) risk and scoring metrics such as technical, fundamental, economic, market sentiment and alternative descriptors and 2) factor modeling paradigms and developments could reveal the weighted market exposure for the dynamic multi-step asset allocation by country in a world of multi-period electronic trading and information.

John Bogle Had It Right: The Benefits of International Diversification Are Limited

Stock index research over long-term periods supports a U-shaped relationship of the total risk to the allocation to foreign stocks (adding foreign equities lowers risk at first then increases it). This study constructs mean–variance efficient frontiers using 28 country exchange-traded funds (ETFs) available to US investors over two periods: 1996–2018 (mostly developed countries) and 2010–2018 (many emerging markets) to determine the optimal global allocation. Over both periods, the US-only ETF had the highest Sharpe ratio. For 1996–2018, the empirical mean–variance “market” portfolio of 17 country ETFs had a 94.5% allocation to the United States, and the minimum-variance portfolio had 56.55% in the United States. Over the 2010–2018 period, the empirical tangent portfolio of 28 country ETFs had a 100% allocation to the United States, and the minimum-variance threshold for efficiency was 52.65%. For both periods, global portfolios based on gross domestic product or market capitalization weights were highly inefficient. Home-country bias may not be a bias at all. Perhaps investors just rationally maximize the return-to-risk trade-off. <b>TOPICS:</b>Wealth management, exchange-traded funds and applications, global markets <b>Key Findings</b> • The empirical “market portfolio” of 28 country ETFs over 2010–2018 shows a 100% allocation to the United States. • The empirical “market portfolio” of 17 country ETFs over 1996–2018 shows a 94.5% allocation to the United States. • Strong US home country bias mean-variance dominates cap- or GDP-weighting in building global index portfolios.

Do natural disasters and geopolitical risks matter for cross-border country exchange-traded fund returns?

This paper examines whether U.S. and home country geopolitical risks (GPRs) and disasters matter for the returns from cross-border trading of country exchange-traded funds (ETFs) by employing a quantile regression approach. Using monthly returns of 125 country-specific ETFs traded in the U.S. from 38 countries over the period 2004–2018, we find that the highest averages of total deaths, total damage values, total affected, and GPRs are all in developing countries. United States disasters have comparatively more significant impacts than home country disasters on ETF returns as does the salient influences of U.S. investor sentiments, supporting the market sentiment hypothesis. Moreover, U.S. and home country GPRs and disasters also have predictive power on returns. The contemptuous effects and predictive powers of GPRs and disasters are asymmetric across quantiles. The influences of home country GPRs are more salient than the GRPS of U.S., implying that ETFs can be a safe haven during U.S. geopolitical risks. Additionally, our results show that the impacts of disasters on returns can be negative and/or positive, implying the possibility of disasters exuding an impetus and/or risk to country ETFs.

Do Country ETFs Influence Foreign Stock Market Index? Evidence from India ETFs

We examine the influence of country exchange traded funds (ETFs) on the country’s stock market indices, irrespective of their underlying benchmark. A pooled ordinary least square (OLS) analysis of a sample of 28 India ETFs listed in the US, UK, Canada, France, Japan, Israel and Singapore reveals that India ETFs have a significant impact on the country’s stock indices. We also document reverse causal dynamics between country ETFs and the country’s stock indices. The results are robust even after controlling for global effects, stock market volatility, foreign institutional investor (FII) flows, foreign exchange rate and asset size of India ETFs. The findings of the study have implications for global investors and policymakers in both emerging and developed markets. Policymakers would find it compelling to monitor country ETFs’ fund flows into the underlying country, as withdrawal of country ETFs could have a cascading effect on the economy.JEL Classification: G11, G15, G23

Market Sentiment and Investor Overreaction: Evidence from New York Listed Asian Country Exchange Traded Funds

ABSTRACTThis article investigates Asian Country Exchange-Traded Fund (ETF) price deviation with underlying due to market sentiment. By implementing a dynamic contrarian trading strategy and a buy-and-hold strategy, this article finds that significant abnormal excess trading profit can be generated by capitalizing on the overnight price reversion. The excess return generated by the dynamic strategy over buy-and-hold separates the influence of market sentiment to ETF price deviation from fundamental movements. By studying the relations between variations of the excess returns and market sentiment, the article finds that the ETF price deviation is highly influenced by market sentiment and the effect exacerbates during financial crisis and distress.

Return and volatility spillovers in equity markets: An investigation using various GARCH methodologies

This paper investigates linkages among equity market returns and volatility spillovers in the following countries: Germany, United Kingdom, China, Russia, and Turkey. MARMA, GARCH, GARCH-in-mean, and exponential GARCH (EGARCH) methodologies are applied to daily data on country exchange-traded funds (ETF) based on the MSCI indices from 31 March 2011 to 11 March 2016. The results of the analysis show the existence of significant co-movements of returns among the countries in the sample. ETF returns in Germany, UK, and Russia affect returns in all of the other sample countries. Implications of these findings are explored in terms of portfolio diversification. In addition, the highest volatilities are exhibited by Russia and Turkey. On the other hand, the UK and the Chinese markets have the lowest volatilities. Also, there is a strong evidence of volatility spillovers. All of the countries in the sample, with the exception of UK and Turkey, experience volatility spillovers from other markets. Finally, because of the risk-return trade-off, we analyzed the effect of volatility of the market on its returns and found that only in the UK volatility of the market had a positive effect on its future returns: that an increase in volatility leads to a rise in future ETF returns in the UK.

Foreign currency exposure within country exchange traded funds

Purpose The purpose of this paper is to consider the implicit effect of the underlying foreign currency exposure on the performance characteristics of country exchange traded funds. Design/methodology/approach To arrive at an overall estimation of the exchange-traded fund (ETF)’s tracking error, the mean of the three measures of tracking error was calculated for both the hedged (r_LC) and unhedged (r_NAV) return series. Since tracking error does not capture all the risk inherent in a country index fund, the study extends the analysis using the Sortino and Modified Sharpe ratios. Findings The decision to hedge currency risk should not be taken on the sole basis of historical volatilities. The investor must also factor in transactions costs, the possible roll of futures contracts and prevailing interest rate differentials. If the rate on the foreign currency is greater than the dollar (euro) rate, the investor will pay for the hedge. If the rate on the foreign currency is less than the dollar (euro) rate, the investor will gain on the trade. Given that hedging entails additional costs, in cases where the neutralization of currency volatility only reduces risk modestly, it would be advisable to leave the exchange rate risk unhedged. We propose two metrics for ETF investors deciding whether to hedge a country ETF’s underlying currency risk. Originality/value The results highlight a key finding: while the majority of country funds accurately track the performance of the underlying foreign index when measured in the local currency, returns in the fund currency can be much more volatile. In breaking down the sources of country fund volatility, the paper demonstrates the impact of the underlying currency movements on overall fund risk. In cases where the currency impact has a significant impact on fund tracking errors, an index-oriented investor benefits from neutralizing the exchange rate effect. Additionally, as the Sortino and Modified Sharpe measures suggest that the underlying currency exposure offers in most cases a better risk-adjusted return for country exchange-traded funds (ETFs) in the listing currency, we also calculate the risk minimizing foreign currency exposure for each fund and propose a decision rule based on the net currency variance to decide whether to hedge the ETF’s currency risk. The optimal hedge ratio indicates that US-based investors should only partially hedge the underlying currency risk while European-based investors are better off fully hedging currency risk.

Foreign Currency Exposure within Country Exchange Traded Funds

Purpose The purpose of this paper is to consider the implicit effect of the underlying foreign currency exposure on the performance characteristics of country exchange traded funds. Design/methodology/approach To arrive at an overall estimation of the exchange-traded fund (ETF)’s tracking error, the mean of the three measures of tracking error was calculated for both the hedged (r_LC) and unhedged (r_NAV) return series. Since tracking error does not capture all the risk inherent in a country index fund, the study extends the analysis using the Sortino and Modified Sharpe ratios. Findings The decision to hedge currency risk should not be taken on the sole basis of historical volatilities. The investor must also factor in transactions costs, the possible roll of futures contracts and prevailing interest rate differentials. If the rate on the foreign currency is greater than the dollar (euro) rate, the investor will pay for the hedge. If the rate on the foreign currency is less than the dollar (euro) rate, the investor will gain on the trade. Given that hedging entails additional costs, in cases where the neutralization of currency volatility only reduces risk modestly, it would be advisable to leave the exchange rate risk unhedged. We propose two metrics for ETF investors deciding whether to hedge a country ETF’s underlying currency risk. Originality/value The results highlight a key finding: while the majority of country funds accurately track the performance of the underlying foreign index when measured in the local currency, returns in the fund currency can be much more volatile. In breaking down the sources of country fund volatility, the paper demonstrates the impact of the underlying currency movements on overall fund risk. In cases where the currency impact has a significant impact on fund tracking errors, an index-oriented investor benefits from neutralizing the exchange rate effect. Additionally, as the Sortino and Modified Sharpe measures suggest that the underlying currency exposure offers in most cases a better risk-adjusted return for country exchange-traded funds (ETFs) in the listing currency, we also calculate the risk minimizing foreign currency exposure for each fund and propose a decision rule based on the net currency variance to decide whether to hedge the ETF’s currency risk. The optimal hedge ratio indicates that US-based investors should only partially hedge the underlying currency risk while European-based investors are better off fully hedging currency risk.

Country ETFs, currencies and international diversification

Empirical evidence shows that market prices of country exchange traded funds (ETFs) react in unison with domestic stocks on their listing exchange to a common set of risk factors. This would argue against the use of indirect foreign investments via country ETFs to diversify a portfolio of domestic stocks. Using the net asset values of a cross-section of US and European-listed ETFs to control for market noise and time zone discrepancies, this study seeks to quantify the diversification benefits of country ETFs for a domestic investor. Moreover, fund returns are decomposed into their two fundamental drivers – the variations of the underlying foreign stocks and the foreign currency – in order to investigate the role of currency returns in modifying correlations between country funds and domestic stocks. To conclude, the analysis is repeated for the pre- and post-financial crisis periods to gain insight into shifts in the relationships between world equity markets since this dislocation.

The Case for Country-specific Closed-end Funds Instead of Exchange-traded Funds

The performance of country exchange-traded funds and closed-end funds is investigated over the 2002 to 2011 period. Operating characteristics (i.e., expense ratios and portfolio turnover) and investment results (i.e., return, risk, and risk-adjusted return) are studied for investment funds with at least ten years of data. We find that although exchange-traded funds have significantly lower expenses, their performance is statistically worse than those of closed-end funds. Despite their accurate, widely-advertised claims to have lower annual expenses, investors would be wise to stay focused on the higher return (after deducting expenses) afforded by closed-end funds.

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.

How Do Local Markets Respond to Global Risk Factor Differently in Various Market Regimes? A Study of Country Exchange Traded Funds

This paper explores how the returns of country exchange traded funds (ETFs) respond to global risk factors in different market regimes. We consider the ETFs for the U.S., Canada, U.K., Germany, France, Italy, Japan, and Australia from May 30, 2000 to March 31, 2011. To answer this question, we use the Bayesian information criterion to select a regime switching model (RS) with six global risk factors and identify three market regimes - bull, transitory and bear markets. The empirical results show that both the returns of country ETFs and their sensitivities to the risk factors are highly regime dependent. First, the U.S. size and value factors are significant in explaining most of selected ETFs across regimes. More specifically, small capitalization is associated with lower returns for all country ETFs (except for Canada) in at least one market regime. High book-to-market ratio generates higher returns for all ETFs in most market regimes. Second, the global stock market return has a positive impact on the returns of all country ETFs. Third, all ETFs returns are negatively correlated with market volatility in bull and bear market regimes. Fourth, a stronger U.S. dollar generates a higher return for the U.S. ETF and lower returns for the other seven country ETFs across market regimes. Finally, the returns of Australia, Canada and U.K. ETFs, which invest heavily in materials, are positively correlated with commodity prices while other country ETF returns are negatively associated with these prices across market regimes.