Frontier markets deliver the wild ride emerging markets used
to. Strong, uncorrelated returns with occasional big drops are
standard for frontier countries.
Although it is tempting to believe professionals can beat the
index in inefficient and overlooked countries as Qatar or Angola,
it is tricky and expensive business.
simplify the process at vastly less expense.
Expect better returns with frontier markets over time, just
don't expect to predict when and where. During the past year,
various frontier ETFs made emerging market (
) look stable:
Higher risk is unwelcome in large amounts, but a small amount
of frontier ETF will barely raise overall portfolio risk. This is
because frontier markets tend to correlate poorly with developed
ones which dominate portfolios. It's one of the few nearly free
lunches available in investing. Correlations to watch out for are
emerging markets and commodities, as most frontier markets today
are propelled by natural resources. It may not pay to load up on
all three asset classes.
Claymore/BNY Mellon Frontier Markets ETF (NYSEArca:FRN) has
perhaps the broadest of any frontier ETF. It provides solid
exposure to 10 worthwhile countries such as Egypt, Colombia and
Kazakhstan. Although it has high exposure to Chile at 31%, the
February earthquake had surprisingly little effect. Fees are
reasonable at 0.65%.
SPDR S&P Emerging Middle East & Africa ETF
(NYSEArca:GAF) has more narrow exposure than its name might
imply. Almost 90% of holdings are from South Africa and Israel
(probably better described as an emerging economy). GAF neglects
Nigeria, Asia, or Gulf States, which would have made it more
useful to the frontier investor.
Africa is a traditional frontier region and increasingly
attractive for investment. According to the International
Monetary Fund's most recent economic survey, "one of the least
noticed aspects of the global downturn has been the resilience of
the sub-Saharan Africa region". Sub-Saharan output is projected
to expand by nearly 5 percent in 2010, compared to 2 percent in
Africa operates with little debt or securitization, so it
mostly sidestepped the recent financial meltdown. Its natural
resource economy is relatively diverse so it absorbed shocks to
individual commodities. Just about every commodity is exported
from there in meaningful amounts, from oil to diamonds to cocoa.
China is building infrastructure to help goods move out of the
interior. Corruption continues to siphon off growth
For African-only exposure, there is Van Eck Market Vectors
Africa Index ETF (NYSEArca:AFK), with annual fees of 0.83%. It
contains large amounts of South Africa, Nigeria, Morocco and
Egypt. Some view South Africa as emerging, but its economy is
tied to other African frontier markets. The iShares MSCI South
Africa ETF (NYSEArca:EZA) allows direct exposure to that
Oil-rich states of the Persian Gulf and Middle East have
traditionally done most of their business in privately held
firms, but exchanges are gaining volume and accounting is
becoming more transparent. Inefficiency and market manipulation
The Gulf and Middle East is represented by WisdomTree Middle
East Dividend ETF (
), with annual fees of 0.88%, and Van Eck Market Vectors Gulf
States ETF (NYSEArca:MES), with annual fees of 0.98%.
Eastern European and Asian nations form another frontier
group. Many are former Soviet satellite states still dominated by
Russia. Some have ample natural resources. The rule of thumb is
that the farther from Western Europe, the slower market reforms
Some quite risky Eastern European countries may be found in
SPDR S&P Emerging Europe ETF (NYSEArca:GUR), with annual fees
of 0.6%. GUR has large exposure to Russia, whose Wild West
atmosphere could easily put it in the frontier camp despite its
superpower diplomatic status. Foreign investor rights are
trampled on heedlessly, accounting fabrications are common, and
theft of company assets is rampant. Some investors put Russia in
its own class due to the size of its markets, its geopolitical
heft and its ample natural resources.
Finally, certain smaller Latin American countries with poorly
developed exchanges and confiscatory tax policies languish in
frontier status. Bolivia, Ecuador and Peru are often mentioned.
Latin American region ETFs are dominated by relatively advanced
economies such as Brazil. And individual country ETFs cover few
of the riskier nations.
Many frontier investors round out their pickings with country
ETFs. Liquidity in country-specific ETFs might seem a concern but
often not a problem. EZA, for instance, is far bigger than any
other fund discussed in this report with $400 Million in
Co-founder of indexfunds.com, author of two books on
investing, and founder of ETFzone.com, Will has been writing on
indexing issues for 8 years. He holds an MBA from the
University of Texas at Austin.