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Are ETFs good vehicles for diversification? New evidence for critical investment periods

Author

Listed:
  • Maria Elisabete Duarte Neves
  • Carla Manuela Fernandes
  • Pedro Coimbra Martins

Abstract

This paper discusses the real effects of diversification, risk, and performance for country-specific exchange-traded funds (ETF) investment vehicles, using a sample of twenty-two iShares for the period 2004–2015, which covers the global financial crisis. Typically, the delimitation of the periods of crises is based on noteworthy events, such as the collapse of Lehman Brothers. In this context, we consider an alternative approach to define the time frames to obtain a more detailed characterization of crisis periods, using a nonhierarchical clustering technique. This method comprises the clustering of the dates with similar ETF prices across countries, which allows the formation of relatively sequential time frames as a function of price volatility. We conclude that the benefits of diversification through this investment vehicle are limited, particularly in times of crisis, indicating the existence of contagion between funds that are indexes.

Suggested Citation

  • Maria Elisabete Duarte Neves & Carla Manuela Fernandes & Pedro Coimbra Martins, 2019. "Are ETFs good vehicles for diversification? New evidence for critical investment periods," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 19(2), pages 149-457, June.
    • Handle: RePEc:bor:bistre:v:19:y:2019:i:2:p:149-157
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    More about this item

    Keywords

    Clustering; Diversification; ETFs; Financial crisis; Principal component analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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