Exchange Traded Funds: Impact on Diversification

Abstract

The diversification potential of iShares is investigated by using sixteen iShares representing two different regions. VAR is used to detect both bidirectional relations between iShares and indexes and regional relations within iShares and indexes. Though iShares do capture information from their home markets, they also have an impact on their home market. Thus, it may be difficult for US investors to avoid systemic impact from the US market. Also, there are regional influences on individual European indexes and iShares and on Asian indexes leading to limitations for diversification. However, Asian iShares do not demonstrate any regional relationships and hence would lend themselves for diversification purposes.