iShares funds are products designed to mimic the movements of MSCI stock market indices. Being devoid of problems associated with trading restrictions, exchange-rate fluctuations and non-synchronous trading, iShares data are better suited for measuring equity-market co-movements and the diversification potential than national indices data that have been used by most of the existing studies in the area. Applying recent time-varying methodology for the analysis of short and long-term co-movements, we provide detailed analysis of the dynamics of the equity market linkages over the period 1996–2005. We find evidence of increasing conditional correlations and significant time-varying long-run relationships between the US and the majority of other G7 markets since 2001, as measured by iShares. By contrast, the extent of both short-term and long-term linkages between the US and G7 equity markets is found to be much lower for national indices data. Our findings suggest that (i) the results of the earlier studies based on national stock market indices should be interpreted with caution, since use of national indices data may overestimate the extent of available diversification benefits; (ii) iShares funds do not represent perfect diversification products.