Date of Award

Spring 2001

Document Type


Degree Name

Doctor of Business Administration (DBA)


Economics and Finance

First Advisor

Marc Chopin


The purpose of this study is twofold. The first objective is to conduct an empirical inquiry into the diversification benefits of exchange-traded funds. The second objective is to examine whether exchange-traded funds exhibit superior performance compared to their rival closed-end country fund and traditional index mutual fund. I document that American investors manifest their preference for WEBS as a substitute for closed-end country funds. While I find that WEBS satisfy their objective of following their home indexes better than their rival closed-end country fund, the two-factor model I employ indicates that, despite some diversification benefits, WEBS also maintain certain risk exposure to the U.S. market. However, the U.S. market exposure of WEBS is marginal relative to closed-end country funds. Thus, WEBS provide American investors with a higher expected rate of return minimizing their risk exposure compared to closed-end country funds.

I find that over one, two, three, and four year periods, WEBS' performance is less dependent on the performance of the U.S. market than their rival closed-end country fund. Thus, I conclude, despite the growing interdependence of world equity markets, American investors are still able to achieve international diversification portfolio benefits by including WEBS in their asset allocation decision.

Also, I examine the performance, diversification and hedging abilities of SPDRs, MidCap SPDRs, sector specific SPDRs, DIAMONDS, and their rival traditional index fund. I document that exchange-traded funds exhibit higher tracking accuracy of their underlying index compared to traditional index mutual funds. Also, on a risk-return basis, investors would accomplish greater performance and diversification gains by employing exchange-traded funds versus traditional index mutual funds.