Correspondence: William F. Johnson, Department of Finance, Barry Kaye College of Business, Florida Atlantic University, 777 Glades Road, Boca Raton, FL 33431, USA. E-mail: Williamfjohnson@yahoo.com

¹is currently a Finance PhD student at Florida Atlantic University, holds an MBA from California State University Long Beach and a BS from University of Arizona. He has worked as a NASD registered representative with Charles Schwab, TD Ameritrade and AXA and also as a visiting professor at Hanoi School of Business and La Trobe University in Vietnam.

Received 26 September 2008; Revised 26 September 2008.

Abstract

This article constitutes a comprehensive study of 20 foreign country exchange traded funds (ETFs) and the underlying index returns from 1997 to 2006. The purpose of the study is to explain the existence of tracking errors between foreign ETFs and the underlying home index on a daily and monthly return basis and what contributes to these differences across time and across countries. This study concludes all, but one market segmentation/integration index rankings proved to be insignificant. Variables such as foreign index positive returns relative to the US index and whether the foreign exchange trades simultaneously with the US markets were significant explanatory variables in the correlation coefficients between ETFs and their underlying home index.