Practical Applications of Return Orthogonality and True Diversification Benefits of BRIC Securities

Practical Applications Summary

In Return Orthogonality and True Diversification Benefits of BRIC Securities, from the Summer 2019 issue of The Journal of Index Investing, Javier Rodríguez of the University of Puerto Rico analyzes the diversification benefits to US investors of using closed-end funds (CEFs) and exchange-traded funds (ETFs) to access emerging markets in BRIC countries. Rodríguez uses a two-factor econometric model and orthogonal returns to isolate US direct market risk and true diversification. He finds that, in general, BRIC ETFs offer better true diversification value and are less exposed to true US market risk than CEFs.