McCall’s Call: ETFs For The Gutsy Frontier


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U.S. stocks have struggled to get out of their own way in 2010 and remain about unchanged after three quarters are in the book. The European markets are faring even worse, with many of the large countries in the region in negative territory for the year.

Matthew D. McCall Even the emerging markets, as measured by the MSCI Emerging Markets Index, have only put together a modest gain of 6 percent in 2010. But there is one area that has been able to avoid the double-dip recession talk and is up significantly over the last nine months-the so-called frontier markets.

Frontier market countries are typically not quite as large as emerging markets countries, such asChina, or they may have certain investing restrictions that won't allow them to be a part of the larger emerging markets indexes.

Examples of frontier market countries on my radar screen includeChile,Egypt,Poland andColombia, and while the investment universe is more restricted than in the emerging markets-the number of frontier market ETFs is growing quickly.

Investing In The Next Frontier With ETFs

Indeed, because it's hard to buy individual frontier market stocks, this world of ETFs offers an invaluable opportunity to investors.

The most popular of the frontier market ETFs is the Guggenheim Frontier Markets ETF (NYSEArca:FRN) that is composed of 46 stocks from 15 countries. The ETF has had a great year so far, gaining over 22 percent and hitting a two-year high. The top three countries make up over half of the portfolio, withChile accounting for 31 percent,Egypt 15 percent andColombia at 12 percent.

FRN's most impressive data point is that its price/earnings ratio is 7.1. That's less than nearly all developed countries and, when combined with the growth potential of the frontier markets, in my opinion it's now a value and growth story. Indeed, low P/E ratios are true of the entire asset class.

Another option is the PowerShares MENA Frontier Countries ETF (NasdaqGM:PMNA), which is a more localized product than FRN that focuses on frontier markets in the Middle East andNorth Africa.

Egypt,Qatar, UAE andKuwait each account for about 20 percent of the allocation, totaling 80 percent of the portfolio. The ETF has lagged FRN in 2010 with a gain of 2 percent for the year. The expense ratio is 0.95 percent and it trades with a P/E ratio of 11.7.

Picking Individual Frontiers

Investors that were lucky enough to have their money in small Latin American countries to begin the year are smiling today. ETFs that focus on individual countries have been the big winners in 2010, led byColombia.

The Global X InterBolsa FTSE Colombia 20 ETF (NYSEArca:GXG) is up 45 percent in 2010 and has gained over 200 percent from the low in February 2009.

The nation once known for political chaos and drug lords has begun to get its act together. The ETF's exposure to energy and financial stocks has been a boost to performance. It's composed of 21Colombia stocks and carries an expense ratio of 0.86 percent.

The iShares Chile ETF (NYSEArca:ECH) has meanwhile gained 35 percent in 2010, helped by its heavy emphasis on utilities, industrials and materials. The fund is composed of 30 stocks and has an expense ratio of 0.65 percent.

The iShares Peru ETF (NYSEArca:EPU) has lagged its peers in 2010, but still has managed to achieve gains of 25 percent year-to-date for investors. The country that is known for its copper reserves has seen its GDP expand by 10.3 percent as the demand for the metal fromChina continues to surge. It's no surprise that 62 percent of the portfolio is composed of material stocks, with financials making up 22 percent. The expense ratio is 0.63 percent.

Allocating Frontier Investments

Over the last year, more single-country ETFs that focus on frontier markets have begun trading in theU.S.

Market Vectors has products that coverPoland (NYSEArca:PLND),Vietnam (NYSEArca:VNM) andEgypt (NYSEArca:EGPT).

I expect to see more ETFs in the future that are concentrated on the frontier markets, as investors look for the nextChina.

When determining which frontier market ETFs are appropriate for your portfolio, the decision should be based on risk tolerance and investment goals.

If the time frame is at least several years, the best option is a fund like FRN, because it allows investors to ride the trend with exposure to different regions around the world. A more short-term goal will force the investor to focus on specific-country ETFs.

Whatever the choice, it's crucial to remember that anyone investing in frontier markets requires patience and the stomach to handle above-average volatility.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.

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Copyright ® 2010 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs

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