Exchange-Traded Funds as an International Diversification Tool for Socially Responsible Investors

Abstract

This study assessed the true international diversification value of socially responsible exchange-traded funds (SRI ETFs) that invest globally, in comparison with their more traditional counterparts. The authors used a two-step process to estimate international diversification value. First, they estimated orthogonal returns, which are the returns of a market free from the influence from other markets; then they used these in a two-factor model to infer the exposure to international markets of SRI ETFs. Overall results showed that SRI ETFs international diversification value was significantly higher than that of conventional ETFs that also invest globally. TOPICS: Analysis of individual factors/risk premia, exchange-traded funds and applications, developed markets, performance measurement Key Findings • ETFs are one of the fastest-growing investment vehicles worldwide. • Socially responsible investments are generating interest among investors, especially millennials. • Global SRI ETFs provide better international diversification than traditional ETFs.