Frontier Markets Losing Some Shine

ETF Trends

On a year-to-date basis, the iShares MSCI Frontier 100 ETF (FM) has been a juggernaut compared to diversified emerging markets ETFs. FM is up 18.5% while the Vanguard FTSE Emerging Markets ETF (VWO) , the largest emerging markets ETF by assets, is down 3.8%.

The past 90 days paint a vastly different as VWO is higher by 6.1%, nearly triple the returns offered by FM, the marquee frontier markets ETF. Recent lethargy by frontier markets equities is not going unnoticed.

HSBC pared its “outlook on Qatar from Positive to Negative; reduced Kuwait from Neutral to Negative and cut Kenya from Positive to Neutral,” reports Johanna Bennett for Barron’s.

Kuwait and Qatar are FM’s top two country weights, combining for over 44% of the ETF’s weight. Kenya is FM’s seventh-largest country exposure at 4.33%. A less enthusiastic near-term view of Middle East markets by HSBC is not altogether surprising as several global banks and fund managers have previously expressed concern about the run-up in Middle East stocks this year. [Middle East Markets Lift Frontier ETFs]

Compounding those concerns as they pertain to FM, Qatar and the United Arab Emirates, which combine for over 32% of the ETF’s weight, were promoted by MSCI to emerging markets status earlier this year. That means FM will not feature those countries when the index transition takes place in May 2014, leaving Kuwait and Nigeria to dominate the ETF. [Changes Could Weigh on Frontier ETF]

HSBC did upgrade Kazakhstan “to Positive from Neutral and initiated coverage on Morocco at Positive,” according to Barron’s. Following its loss of emerging markets status, Morocco will join FM next year. Kazakhstan is the ETF’s ninth-largest country weight at 3.47%.

Investors looking for additional exposure to Kazakh equities can evaluate the Global X Central Asia & Mongolia Index ETF (AZIA) as Kazakhstan is that ETF’s second-largest country weight at almost 23.3%.

iShares MSCI Frontier 100 ETF

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ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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