Abstract
The paper shows that country-specific exchange traded funds (hereafter ETFs) enhance global asset allocation strategies. Because ETFs can be sold short even on a downtick, global strategies that diversify risk across country-specific ETFs generate efficiency gains that cannot be achieved by simply investing in a global index open or closed-end fund. Besides, the benefits of international diversification can be achieved with country-specific ETFs at a low cost, with a low tracking error and in a tax-efficient way. For all these reasons, country-specific ETFs may be considered as serious competitors to traditional country open and closed-end funds.
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Notes
Academic research suggests that it is nearly impossible to consistently beat the market (Jensen, 1968; Malkiel, 1995; Gruber, 1996; Carhart, 1997; Frino and Gallagher, 2001).
International Federation of Stock Exchanges, www.fibv.com.
Mean-variance optimisers are very sensitive to small changes in the initial estimates of the return distribution. Besides, the estimates with the biggest measurement errors are likely to have the most prevalent influence on the optimal asset allocation. For this reason, mean-variance optimisers have been criticised as ‘estimation error maximisers’ (Michaud, 1989). Attempts have been made to correct for these limitations, using, for example, Bayes-Stein estimators (Chopra et al., 1993) or by constraining the outputs (Sheedy et al., 1999). In the end, mean-variance optimisers cannot replace the informed judgement of an asset manager. The optimiser is simply a computational convenience that helps him/her translate his/her forecasts of assets’ returns, risks and correlations in an efficient portfolio.
US examples include the DIAMONDs futures and the ETF futures that track the Nasdaq 100, Russell 1000, Russell 2000 and Russell 3000 indices. Similar financial innovation took place in Europe with the Euro Stoxx 50, DAX and SMI ETF futures.
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Acknowledgements
I would like to thank N. Handa, M. Madelski, G. Questa and the participants at the European conference of the Financial Management Association (2004) for helpful comments.
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Miffre, J. Country-specific ETFs: An efficient approach to global asset allocation. J Asset Manag 8, 112–122 (2007). https://doi.org/10.1057/palgrave.jam.2250065
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DOI: https://doi.org/10.1057/palgrave.jam.2250065