The Use of ETFs in Internationally-Focused Mutual Fund Portfolios

Abstract

We explore the implications of US-based, internationally-focused equity mutual funds holding exchange traded funds (ETFs). We observe significant differences in how ETFs are used by international mutual funds compared to their domestic equity counterparts. Internationally-focused mutual funds use ETFs to alter the return-based and country risk exposures of the mutual fund. In addition to altering the risk of the fund, we find increases in ETF-use coincide with a change in performance, an investment in a greater number of countries, and a reduction the number of direct equity holdings.