Uncertainty in the U.S. markets, the ongoing euro-zone debt
crisis, has shaken investors' confidence in some developed nations.
As such, investors are looking for the opportunity to purchase
securities elsewhere-namely in emerging nations-- which have
potentially higher returns with comparable risks. Of these emerging
markets, the frontier market subset could be an intriguing, but
often overlooked, segment for those who are betting on longer term
Over the past two years, the frontier markets, such as the
Middle East, parts of Southeast Asia, South America, and
sub-Saharan Africa, are gaining popularity over the developed and
developing markets. These nations are considered to be the subset
of emerging markets that are in the very early stages of economic
and financial growth. They also generally have lower market
capitalization and liquidity than the relatively developed
Top Three Emerging Market Consumer ETFs
Additionally, economies in the frontier markets are smaller and
less recognized than the BRICs, and can also face more political
instability. Despite the negative attributes, they are growing at a
faster pace and have better growth prospects over the next several
years thanks to the commodities boom, globalization, and increased
productivity and consumption. (Read:
Top Three BRIC ETFs
Below, we highlight three ETFs which target the frontier markets
around the world. These products allow investors to target these
quickly growing nations in basket form, a technique which can lower
overall risk levels especially when compared to individual stock
investing. Given the generally higher risk levels in these nations,
this could be the way to go for risk adverse investors going
Vietnam In Focus
Recently, the Bloomberg Markets Magazine revealed in its report
that Vietnam is the top pick among the 15 most promising frontier
markets in the world. This is currently leading a variety of other
nations including rapidly growing markets such as the UAE, and fast
growing European countries such as Bulgaria and Romania.
This has been reflected in the Ho Chi Minh Stock Exchange's VN
Index so far in 2012 as the benchmark has gained more than 20%
year-to-date. Furthermore, this nice surge in price has been
supported by increased volume levels, suggesting that investors are
beginning to broadly take another look at the market for their
Despite this surge in the market, the country is not without
risks. The market was beaten down severely in 2011 after currency
issues and austerity measures impacted the broad economy.
Yet, these measures are starting to bear fruit, especially when
looking at the inflation rate. The rate of price increases are
moderating while the trade deficit reached its lowest level in the
past five years, suggesting an improving trade balance.
Furthermore, the World Bank has recently projected that Vietnam's
GDP will increase to 6.1% in 2012, implying a further bounceback in
the nation's fortunes.
Further, Vietnam, the Southeast Asian economy, is poised to
benefit from the rebound in global risk appetite, cheap labor,
fast-growing and young population, dropping unemployment rate and
more foreign inflows. As a result, Vietnam looks promising to us
for the long-term. (Read:
Is The Vietnam ETF Back On Track?
Market Vectors Vietnam ETF
In order to play this market directly, investors have Van Eck's
VNM. This ETF tracks the price and yield performance of the Market
Vectors Vietnam index, before fees and expenses.
The Market Vectors Vietnam index consists of basket of
securities that are domiciled and primarily listed in Vietnam and
generates at least 50% of their revenues from the country. The
index is modified cap-weighted and float adjusted, charging
investors 76 basis points a year in fees after waivers.
The ETF seeks full replication of the underlying index, holding
35 stocks in the Market Vectors Vietnam index. Launched in November
2009 and with total assets of $300 million, the fund is
non-diversified and uses passive investment approach.
Mid and small companies hold more than 63% of assets with 59.18%
concentrated in the top 10 holdings. Top holdings include Baoviet
Holdings, Vincom JSC and Vietin Bank. While from a sector
perspective, financials, energy and industrials take the top spots
in the basket.
The fund registered uninspiring growth last year with negative
returns of 43.80% as against index return of negative 41.56%.
Nevertheless, it has delivered outstanding returns of 31.68% in the
first two months of this year outpacing the index return of 26.00%.
In addition, the fund yields a decent dividend yield which should
help to offset the fund's expense ratio.
Though the fund is a high-cost choice in the frontier space and
is exposed to specific country risks, we believe VNM is expected to
generate strong returns going forward as fears are waning with the
ease of inflationary pressures and narrowing trade deficit going
Inside The Vietnam ETF
PowerShares MENA Frontier Countries ETF
For a broader play on frontier markets, investors have a few
options at their disposal. In the Mideast and North Africa space,
PowerShares has its PMNA ETF. The fund seeks to match the
performance and yield of the NASDAQ OMX Middle East North Africa
index, before fees and expenses.
This benchmark provides exposure to the 46 stocks of the
companies that have majority of their assets in the Middle East or
North African (MENA) frontier countries, which includes Egypt,
Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United
Arab Emirates. The ETF uses full replication of the underlying
index, holding all 40 stocks in the benchmark. The largest
allocations of the fund is geared towards Qatar, Kuwait, Egypt and
United Arab Emirates, which makes up more than 73% of the
The performance of the fund depends hugely on the financial
sector that makes up an enormous 70% of the assets. Additionally,
investors should note that the product is relatively top heavy as
it puts 55.47% of its assets in the top 10 companies. Top three
holdings include Arab Bank, Qatar National Bank, and National Bank
of Kuwait (Read:
Top Three High Yield Financial ETFs
The fund was initiated in June 2008 and charges higher fees of
0.70% per year after waivers compared to the category average of
0.65%. Last year, the fund generated negative returns of 22.13% as
compared to its underlying index return of negative 20.80%.
Year-to-date, the fund showed impressive growth, climbing to 9.13%.
It also generates an excellent dividend yield of 4.26% per annum,
largely thanks to the heavy banking exposure.
Guggenheim Frontier Markets ETF
For a moral global approach to frontier market investing,
investors should focus in on Guggenheim's entrant in the space. The
fund seeks to match the performance of the Bank of New York (
) Mellon New Frontier DR Index, before fees and expenses. The
stocks of this benchmark represent countries from a variety of
markets and which trade on liquid Western exchanges including the
LSE, NYSE, NYSE Arca, AMEX or NASDAQ.
The BNY Mellon describes frontier market countries based on the
GDP growth, per capita income growth, past and expected inflation
rates, privatization of infrastructure and social inequalities. The
fund invests at least 80% of its assets in the form of ADRs or GDRs
and represents a sizable number of large cap firms.
The fund uses a passive index strategy and utilizes a full
replication technique, holding 39 stocks of companies in its
basket. The fund focuses largely in Latin America region with
financial as the top sector. It is also concentrated from an
individual security perspective as it puts around 60% of the assets
in top 10 companies, including EcoPetrol, and Empresa Nacional de
Electricid as some of the top holdings. (Read:
Latin America ETFs: Beyond Brazil
Initiated in June 2008 and with total assets of $136.5 million,
the fund is the low cost choice in the Frontier space with expense
ratio of 0.65%. Like other Frontier ETFs, FRN also underperformed
with negative returns of 22.40% last year. However, it generated
17.70% returns year-to-date and has a massive 3.9% annual dividend
Frontier Market Investing Synopsis
Though most of the Frontier markets ETFs are expensive and less
liquid with low market capitalizations, we recommend them over
their broader emerging market cousins for long term investors based
on their future growth prospects and positive macro data points.
Additionally, since many of these countries receive paltry
allocations in broad emerging market funds, they could also help
from a diversification perspective helping to round out portfolios
from a geographic standpoint for most investors.
See more about ETF investing at the
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