Risks, Returns, and Portfolio Diversification Benefits of Country Index Funds in Bear and Bull Markets

In this paper, we study the risk-return performance of 23 Ishares country index funds in the U.S. during the May 19, 2008-March 9, 2009 bear market and the March 9, 2009-January 19, 2010 bull market. Our findings with the Sharpe and Treynor portfolio performance measures indicate that the Malaysia, Japan, U.S., and Switzerland country index funds had the best performance in both markets. The statistics indicate that, in terms of loss recovery from the bear market to the bull market, the Malaysia, Singapore, South Africa, and Australia funds had the best performance and the Belgium, Austria, Italy, and Germany funds had the worst performance. Exchange-traded country index funds make it easy for investors to achieve global diversification. Our findings with the PCA (Principal Components Analysis) methodology indicate that investors had more global diversification opportunities in the March 9, 2009-January 19, 2010 bull market than in the May 19, 2008-March 9, 2009 bear market.