Stable Currencies Help Frontier Market ETFs Attract Investors

ETF Trends

Emerging and developed markets started 2014 in downbeat fashion, frontier countries and the related exchange traded funds, have come out relatively unscathed, attracting investors with their fixed currency policies.

Funds exposed to less-developed countries experienced inflows of $407 million over the first six weeks of the year, compared to the $21 billion in outflows from emerging market funds, reports Maria Levitov for Bloomberg.

The iShares MSCI Frontier 100 ETF (FM) saw 97.8% in net asset inflows year-to-date, according to ETF.com. Meanwhile, the iShares MSCI Emerging Markets ETF (EEM) experienced $6.8 billion in outflows. [Global ETFs to Diversify Emerging Market Risk]

As emerging market currencies crumbled against the U.S. dollar during the recent bout of volatility, benchmark stock indices in the United Arab Emirates, Qatar and Vietnam – countries with central banks that control the local currencies – are among the best performers this year.

“Half of MSCI frontier have effectively fixed exchange rates to the dollar,” Charles Robertson, global chief economist at Renaissance Capital, said, adding that strong economic growth also heightened interest.

Persian Gulf countries peg their currencies to the U.S. dollar since earnings from energy exports are denominated in the U.S. currency. Additionally, Rami Sidani, head of Middle East and North Africa investments at Schroder Investment Management, points out that Persian Gulf markets have current account surplus and don’t rely on global financing.

Qatar has also benefited from its large liquified natural gas exports. Dubai shares are strengthening from an economic recovery and infrastructure spending ahead of the World Expo in 2020.

Qatar and the UAE make up 36.7% of the iShares Frontier Market ETF. However, the two countries were promoted to emerging status from the frontier classification last year by index provider MSCI and will join the MSCI Emerging Markets in the second quarter. FM tracks the MSCI Frontier Markets Index and EEM follows the MSCI Emerging Markets Index.

The WisdomTree Middle East Dividend Fund (NasdaqGS: GULF ), on the other hand, holds no distinction between emerging or frontier and holds a 58.7% weight toward the two Middle East countries. [Teeing Off With GULF]

EEM has declined 6.3% year-to-date, whereas FM is up 2.7% and GULF is 12.8% higher.

Additionally, the Market Vectors Vietnam ETF (VNM) is another performing frontier market so far this year, gaining 17.2% year-to-date. [Don’t Miss Saigon: Another Surge for the Vietnam ETF]

For more information on the frontier markets, visit our frontier markets category.

 

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