Improving international diversification benefits for US investors

•We propose a dynamic international diversification strategy for US investors.•We employ country ETFs avoiding non-synchronous and currency problems.•We include an accurate prediction of expected returns in the optimization problem.

There are two main questions that have attracted considerable attention in the financial literature over the last few years: whether international diversification benefits are still substantial in the current context of increasing market correlations and which approach provides better results in terms of out-of-sample returns and risk. In this context, the aim of this study is to provide empirical evidence about the economic gains that a US investor could obtain with a dynamic strategy based on the use of time varying returns and volatility forecasts from a multivariate VAR–DCC approach for the exchange trade funds of US, UK and Japan which are the most actively traded on the New York Stock Exchange in recent years. These findings are relevant not only for academics, but also for practitioners, especially for professional portfolio managers.