As the major emerging economies are beginning to mature and
slow-down, they will no longer able to repeat their stellar
performance of the recent past. So the investors looking for the
"next big thing" in the investing world are now turning to
"frontier" or "pre-emerging" markets. These countries offer
compelling investment opportunities with solid growth potential
and low valuations.
Although there is no strict definition for frontier markets,
these are typically countries that are in the earlier stages of
economic development. Their capital markets are underdeveloped
and not fully/easily accessible to foreign investors.
The term "Frontier Markets" was first used by the
International Finance Corporation to describe a set of small,
illiquid and underdeveloped markets. Now MSCI, S&P and
Russell have their own definitions of "Frontier Markets".
MSCI Frontier Markets Index currently includes 31 countries.
Most of these countries are in Middle East, sub-Saharan Africa,
Southeast Asia, Latin America or Eastern Europe regions. (Read:
Best Latin America
for 2013 Part
Frontier markets are expected to grow faster than emerging and
developed economies. Further, they have relatively lower
valuations as well as higher income yield.
As emerging markets have become increasingly integrated with
the global markets, their correlations with the developed markets
have increased and the benefits of diversification have declined.
o Single Country ETFs provide
On the other hand, frontier markets still have relatively
lower correlations with the developed markets. Thus adding them
as small satellite holdings in an investment portfolio can
improve risk-adjusted returns over long term.
However the investors need to be aware of liquidity, currency
and political risks of investing in these countries as they are
much riskier even compared with most emerging markets.
As investing in a single country or company can lead to
significant risks, it makes more sense to invest in these
countries through frontier markets ETFs, that invest in a large
number of countries and companies and thus spread out risk.
Is the Best Bond ETF in Europe?
Guggenheim Frontier Markets ETF
FRN seeks to match the performance of the BNY Mellon New
Frontier DR Index. BNY Mellon defines frontier market countries
based on the GDP growth, per capita income growth, inflation
rate, privatization of infrastructure and social
However the top countries included in the ETF-Chile (43%),
Colombia (15%), Egypt (11%) and Peru (9%)--which account for
about 78% of the holdings are "emerging" markets" and not
"frontier" markets per MSCI and S&P.
The fund is top-heavy with about 60% of the assets in top 10
companies, while EcoPetrol, Latam Airlines, Bancolombia are the
the top four holdings.
Initiated in June 2008 and with total assets of $166.8
million, the fund is the lower cost choice in this space with
expense ratio of 65 basis points. It pays out 2.96% yield at
PowerShares MENA Frontier Countries ETF
PMNA is based on the NASDAQ OMX Middle East North Africa
index, which seeks to track the performance of liquid companies
in MENA (Middle East and North Africa) frontier countries.
In terms of country exposure Qatar (25%), Kuwait (25%), Egypt
(23%) and United Arab Emirates (20%), account for majority of the
The fund is heavily tilted towards the financial sector that
makes up about 62% of the assets. Top three holdings include
Mobile Telecommunications, Qatar National Bank, and National Bank
The fund was launched in September 2008 and manages assets of
$16.6 million currently. PMNA charges fees of 70 basis points per
year and pays a dividend yield of 2.78% as of now.
iShares MSCI Frontier 100 Index (
FM--launched in September 2012--is the newest product in this
group. It is based on the MSCI Frontier Markets Index, which is
composed of 100 largest securities from the eligible universe,
ranked by float adjusted market capitalization.
In terms of country exposure, the Gulf States dominate, as
Kuwait (28%), Qatar (17%), and the UAE (11%) are in the three
spots out of top four, with Nigeria (13%). Like the other two
ETF, financials dominate in terms of sector exposure, accounting
for a whopping 54% of the total assets, while telecoms (15.8%)
and energy (9.1%) round out the top three.
The fund charges an expense ratio of 79 basis points and pays
out a 30-day SEC yield of 2.79% currently.
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ISHRS-MSCI F100 (FM): ETF Research Reports
GUGG-FRONTR MKT (FRN): ETF Research Reports
PWRSH-MENA FRON (PMNA): ETF Research Reports
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