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ETFs to Celebrate Pakistan Day

Pakistan represents an untapped Asian market for U.S. investors. The Pakistan Stock Exchange is the key benchmark in the country and houses over 550 companies. With the approaching Pakistan Day on March 23, which commemorates the adoption of its first constitution, let’s take a fresh look at the economy of the country.
 
Pakistan’s equity market had a bad start to 2016 thanks to the global sell-off and foreign investment outflow primarily from the oil and gas sector. However, the country is working on a turnaround. In a review of Pakistan’s economic program, the IMF positively stated that the country is on a growth trajectory and is expected to benefit from low oil prices and strong investment due to the implementation of the China Pakistan Economic Corridor (CPEC).  The aim of CPEC is to boost Pakistan’s infrastructure and its industrial sector (read: Can Emerging Market ETFs Sustain the Rally?).
 
However, as a caveat, we would like to remind investors that like many other frontier markets, Pakistan is also fraught with political tensions, which might hurt the potential stock market outperformance at any given time. Additionally, stocks in frontier markets in developing countries generally have smaller market capitalization and lower levels of liquidity than large emerging markets. So investors planning to invest in this market should have a relatively high risk tolerance.
 
Keeping these points in mind, we highlight three ETFs – MSCI Pakistan ETF (PAK), Guggenheim Frontier Markets ETF (FRN) and iShares MSCI Frontier 100 Index (FM) – that have high exposure of 100%, 9.7% and 9.6%, respectively, to Pakistan. All three have a Zacks ETF Rank of 4 or ‘Sell’ rating (see: Broad Emerging Market ETFs here).
 
PAK
 
This ETF looks to track the MSCI All Pakistan Select 25/50 Index which holds about 36 securities in its portfolio. The fund charges 68 basis points a year. The portfolio is heavy in financials at 34% of assets, while basic materials (23%) and energy (18%) round off the top three. The top three companies of the fund have almost one-third exposure. The fund has total assets of $5.3 million with paltry volumes of 3,000 shares. It has gained 1.1% so far this year.


FRN
 
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 inequalities. With 58 stocks in its basket, the fund has about 43% of the assets in the top 10 companies, while financial services has the highest exposure at 42%. With total assets of $37.7 million, the fund has average volume of 37,000 shares and an expense ratio of 71 basis points. It has returned 2.5% so far this year.


FM
 
FM 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. The fund has AUM of $16.9 million and trades in average volumes of 354,000. It has 106 stocks in its basket with none holding more than 7% weight. Financials dominates in terms of sector exposure, accounting for a whopping 51% of total assets. The fund charges an expense ratio of 79 basis points. It has lost 1.6% in the year-to-date period.


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GLBL-X PAKISTAN (PAK): ETF Research Reports
 
GUGG-FRONTR MKT (FRN): ETF Research Reports
 
ISHRS-MSCI F100 (FM): ETF Research Reports
 
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Zacks Investment Research
 
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