Among the scores of new ETFs to debut this year has been an
addition to the frontier markets fray, the iShares MSCI Frontier
100 Index Fund (NYSE:
). That ETF launched about 11 weeks ago and since then has
accumulated $14.3 million in assets under management.
As the name implies, the iShares MSCI Frontier 100 Index Fund
is designed to hold the 100 largest frontier market firms as
designated by index provider MSCI (NYSE:
). The rub with the frontier markets designation is that it
implies a degree of risk that is higher
than that of emerging markets
Take the example of Argentina, which accounts for almost 3.4
percent of FM's weight. Over the years, investors have warmed to
Brazil and Chile. Colombia and Peru, two Latin American markets
with perceived higher risks, have also caught investors'
attention. However, Argentina is now in danger of
losing its frontier status
due to the government's anti-foreign investment practices.
In other words, asking investors to warm to the likes of
Brazil, China, India and Indonesia is one thing. Asking them to
embrace Argentina, Nigeria and almost any country ending in
"-stan" is another ballgame altogether. Still, there are some
fundamental advantages to investing in frontier markets.
"Additionally, about 30% of the total global population is
spread across Frontier nations, while forecasts have many of the
Frontier nations among the world's fastest growing economies,"
said David Chojnacki, Street One Financial market technician, in
a research note. "Frontier nations that MSCI includes in their
universe include Kuwait, Qatar, UAE, Nigeria, Kazakhstan,
Pakistan, Argentina, Oman, Vietnam, and Kenya and we point out
that these nations have demonstrated rather low intra-market
correlations over time. These low relative correlations ends up
adding a positive element to broader portfolios in terms of the
addition of non-correlated assets."
iShares previously said frontier markets had a three-year
correlation to U.S. stocks of just 0.5, Chojnacki noted. The
$154.7 million Guggenheim Frontier Markets ETF (NYSE:
) has a three-year correlation to the SPDR S&P 500 (NYSE:
) of just 0.27,
according to State Street data
FRN, which debuted in June 2008, stands as the most noteworthy
rival to FM, but the former is not a pure play on frontier
markets. Chile, Colombia and Peru, all emerging markets, combine
for over 63 percent of FRN's weight. Kuwait, Qatar, Nigeria and
the United Arab Emirates, all considered frontier markets,
combine for almost 71 percent of FM's weight.
By way of the frontier markets' low correlations to U.S.
equities, FM has another potential advantage: Lower
"Interestingly, despite what popular convention may suggest,
Frontier Markets have demonstrated much less volatility than both
the MSCI Emerging Markets Index as well as the S&P 500 Index
in both the financial crisis of 2008 as well as in the current
day marketplace," wrote Chojnacki.
FM is home to nearly 100 stocks and charges 0.79 percent per
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