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Defining Frontier Market ETFs


Investors have been looking past developing economies toward supposedly riskier frontier markets. With exchange traded funds, anyone can access less developed countries just beginning to shape their economies.

Charlie Robertson of Renaissance Capital argues that the frontier markets could experience their own run up similar to the 1990s growth spurt in the emerging markets, The Economist reports.

Frontier countries, or pre-emerging markets, have less advanced capital markets, or less established investable markets, than emerging countries. These countries can generate potentially outsized returns, but investors have to be comfortable with the greater level of risk, such as political instability, corruption and poor regulations, among others.

To meet the criteria as a frontier market, the country’s market must have at least two stocks that have specific thresholds for size and liquidity, and should be “accessible,” or open to foreign access. About 24 markets across eastern Europe, the Middle East, Africa and Asia, with a combined $146 billion in market capitalization, meets these factors.

The MSCI Frontier Market benchmark includes a hefty weight toward oil-rich Gulf states: Qatar, the United Arab Emirates and Kuwait. However, Qatar and UAE are set to move into the emerging market category.

The frontier markets may have once been a side allocation for broader emerging market exposure, but Andrew Brudenell, a manager of frontier equity funds at HSBC, believes they are now an asset class in their own right. [The Ongoing Allure of Frontier Markets]

ETF investors have a few options to access broad frontier market exposure. For instance, the largest ETF, the iShares MSCI Frontier 100 ETF (FM) , tracks the MSCI Frontier Market 100 Index, which includes country exposure to Kuwait 20.8%, Qatar 18%, UAE 17.9%, Nigeria 11.3%, Argentina 5.4%, Pakistan 4.4%, Kenya 3.7%, Morocco 3.6%, Oman 3.1% and Kazakhstan 2.8%. FM has a 0.79% expense ratio.

The Guggenheim Frontier Markets ETF (FRN) may have frontier markets as part of its moniker, but the ETF includes significant exposure to emerging economies. Specifically, FRN includes emerging countries Chile 44.1%, Colombia 13.8%, Egypt 7% and Peru 6.6%. The ETF has a 0.7% expense ratio.

The Global X Next Emerging & Frontier ETF (EMFM) includes country exposure outside of the major emerging BRICs – Brazil, Russia, India and China. While EMFM includes some emerging economies, the ETF also includes frontier markets exposure to Argentina, Bangladesh, Gabon, Georgia, Kazakhstan, Kenya, Kuwait, Laos, Mongolia, Nambia, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Qatar, Slovakia, Tanzania, UAE and Vietnam. The fund has a 0.58% expense ratio. [An Emerging and Frontier Markets ETF Sandwich]

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

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.