Emerging markets have been in the limelight due to their
stellar performance in the past few years but they have lost
their luster lately. So far in 2013, many emerging markets
suffered steep declines, mainly due to the 'taper talk, which is
making investors reconsider emerging markets in general.
Beyond the taper, current account deficits and political woes
have also impacted these markets. Investors are growing concerned
about the political situation in many countries, in addition to
rising inflation and growing current account deficits.
Many nations in this space have seen their benchmarks fall by
double digits, pushing a number of developing nations into crash
territory. Lately, emerging country funds from India, Indonesia,
Thailand, Turkey and China have been struggling with weak
Time to Panic About Emerging Markets?
On the other hand, many smaller emerging markets or frontier
markets have managed to remain rather unaffected by the turmoil
in the broader emerging markets space.
About Frontier Markets
Frontier markets include countries that are in the early stages
of economic development and are less established and developed
than emerging nations. When compared to emerging markets,
frontier markets have low market capitalization and liquidity
Frontier Markets: A Better Choice for ETF
Moreover, frontier markets have a low correlation with the
developed markets which may benefit investors at a time when
investing in emerging nations isn't fruitful. Further, they have
relatively lower valuations as well as higher income yield.
One of the reasons for outperformance of frontier markets is the
currency factor. ETFs tracking frontier markets are dominated by
Middle East countries. Many of these countries peg their
currencies to the US dollar or to a basket dominated by the US
dollar. As such these currencies have remained steady while
currencies of most emerging markets have suffered a lot of pain.
Currency losses have been a big factor is emerging markets' poor
Further, during its latest classification review MSCI promoted
UAE and Qatar to emerging market status from frontier market. The
upgrade resulted in increase in capital flows to the Middle East
Why should you play here?
Of late, frontier funds have amassed $1.5 billion in assets this
year in contrast to steep outflows for many of the largest
emerging market ETFs, reports Bank of America Merrill Lynch.
The space mostly benefits from the markets of Kuwait, Qatar and
United Arab Emirates (UAE) that are more focused on local demand
and are free from global market risks (Read:
Time for Frontier Markets ETFs?
Though the frontier markets provide a good investment strategy
for those looking for attractive returns over the long term, a
high level of volatility and poor liquidity are risks that run
high in these markets. High inflation levels are also a headwind,
as many have trouble keeping inflation under control.
How to play?
For investors who are willing to take some risk and seek to reap
the benefits, we have highlighted two ETFs which track broader
frontier markets space.
iShares MSCI Frontier 100 Index
Launched in Sep 2012, FM tracks the MSCI Frontier Markets Index,
which is ranked by float adjusted market capitalization. It is
one of the most popular funds in the space and puts more focus in
large cap securities. The fund has an asset base of $286.3
million and has an average daily trading volume of 115,000 shares
The ETF holds 101 securities in its basket. The top ten holdings
of the fund take almost 39% share in the basket. In terms
of country exposure, Kuwait (25.75%), Qatar (19.02%) and the UAE
(14.74%) are in the top three spots. Financials dominates in
terms of sector exposure, accounting for a whopping 56% of the
total assets, while Telecommunication (14.15%) and Industrials
(11.56%) round out the top three.
The fund is a bit costly in the space, charging investors a hefty
fee of 79 bps. However, the fund has given strong returns of over
17% year to date and also pays a 30-day SEC yield of 4.09%.
PowerShares MENA Frontier Countries ETF
Launched in Jul 2008, PMNA tracks the NASDAQ OMX Middle East
North Africa index, which seeks the performance of liquid
companies in MENA (Middle East and North Africa) frontier
countries. So far, the fund has amassed only $15.2 million in
The fund holds 43 securities in its basket. The fund is more
concentrated in its top 10 holdings as it puts nearly 55% share.
Citadel Capital, National Bank of Kuwait and Union Land
Development Corp. are the top three company holdings of the fund.
The ETF is tilted more towards Financials as it leads the sector
with about 74% share, while
Telecom and Industrials allocate a respective 14% and 8%. In
terms of country exposure, Kuwait (23.53%), UAE (18.3%), Egypt
(16.19%) and Qatar (15.17%) account for the majority of asset
The product charge investors 70 bps in fees. The fund has
generated returns of 9.5% on a year-to-date basis and has a
decent yield of 1.68% (Find all
broad emerging markets ETFs
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ISHRS-MSCI F100 (FM): ETF Research Reports
PWRSH-MENA FRON (PMNA): ETF Research Reports
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