Survivorship Bias and Global Equity Returns

Stock market decline.

 Getty Images / erhui1979

Imagine that an international investor is analyzing a universe of 20 international exchange-traded funds (“ETFs”) focused on a given region of the world. Now, suppose that five ETFs close during the year due to poor performance, leaving only 15 ETFs tracking that particular region of the world. Without proper research, an investor may only evaluate the 15 ETFs, assuming they are representative.

The problem with this scenario is that the investor’s analysis will almost certainly overestimate the average performance of the 15 ETFs in the universe. After all, the five ETFs that dropped out likely had worse than average performance, which means that they would have weighed down on the average had they been considered alongside the 15 active ETFs in the universe.

These dynamics are known as the “survivorship bias” and they occur when investors only consider the survivors at the end of a period and exclude those investments or funds that no longer exist.

In this article, we will take a look at how to account for survivorship bias when evaluating global equities, which can help international investors avoid costly mistakes.

Evaluating Global Assets

Survivorship bias is an easy mistake to make when evaluating global equity performance. By ignoring companies that went bankrupt throughout the year, it’s easy to inflate the track record of the remaining companies. International investors analyzing individual foreign stocks may want to pay especially close attention to survivorship bias issues since it’s an easy mistake to make.

For example, an international investor interested in Argentina’s oil and gas sector may screen for American Depositary Receipts (“ADRs”) operating in the space. They may find that the stocks listed in the screen appreciated by 20% over the past year. If several other companies ended up going bankrupt over the same period – and didn’t appear on the screener – the 20% growth rate is overstated.

International investors can avoid these problems by looking at public records to identify companies that have gone bankrupt. In some cases, these companies can be easily found through news sources or analyst reports covering the industry. In other cases, investors may have to look through bankruptcy filings, delisting notices, or other public records to find true figures.

Discovering ETFs & Funds

International investors should be aware of survivorship bias when analyzing ETFs and other funds, too. While the funds themselves likely account for these issues when calculating their own performance, international investors screening for a variety of funds targeting a certain country or sector involves the same risks seen in the previous section when analyzing individual stocks.

For instance, an international investor may be looking to invest in Russian equities and screen for international ETFs with exposure. The investor may find that these equities yielded a 5% return over the past year, but a failure to look at any ETFs that have closed down throughout the year could overstate these returns.

These problems can be avoided by researching funds that may have closed down. The problem is that it can be difficult to identify these funds from public sources. Again, news reports or analyst reports often provide the best starting point for such information, but they may not be comprehensive or updated.

Avoiding the Bias With ETFs

International ETFs provide a great way for international investors to avoid the problems associated with survivorship bias. Funds employing a full replication strategy purchase all stocks within an index, as opposed to using derivatives to gain exposure, which means they buy and sell shares to track the index as closely as possible over long periods of time.

By looking at the holdings of these ETFs at various points in time, international investors can build a database that contains the historical index compositions of a given country, region, or another type of international ETF. The database effectively provides a survivorship bias-free measure of that country’s performance, which can make ADR and foreign stock analysis a lot easier.

Fund holdings can be easily found on most fund websites or prospectuses, which typically contain a downloadable Excel spreadsheet for a given period. If these sources are unavailable, ETFs must report their holdings on a regular basis with the SEC in N-Q filings, which can be found on

Key Takeaway Points

  • Survivorship bias occurs when international investors fail to account for assets that no longer exist when calculating performance over time.
  • Screening for international stocks or ETFs introduces survivorship bias by eliminating those assets that no longer exist from consideration.
  • International investors can avoid survivorship bias using international ETFs or by looking for ETFs or other assets that have been shut down.