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Frontier ETF Outperforming Emerging Markets


Emerging market stocks have been underperforming so far this year and saw further declines on the Fed “tapering” speculation. However, the frontier markets exchange traded fund has experienced robust gains, even surpassing U.S. stocks.

The iShares MSCI Frontier 100 ETF (FM) has gained 15.0% year-to-date. In comparison, the iShares MSCI Emerging Markets Index (EEM) declined 8.6% so far this year and Vanguard FTSE Emerging Markets ETF (VWO) is 8.1% lower. Meanwhile, the S&P 500 Index has increased 13.9% this year. [iShares: Three Reasons Not to Turn Away from Emerging Market ETFs]

The MSCI Frontier Market Index rose 13.3% over the first five months of the year, the best performance for the five month period since the index’s creation five years ago, reports Pan Kwan Yuk for Financial Times. Meanwhile, the MSCI Emerging Markets Index declined 4.4%.

“Using EPFR data, funds classified as frontier have seen inflows this year of close to 20 per cent of assets through April – much more than EM funds have seen (8 per cent of assets),” according to Citi analysts. “So far in May, FMs have seen $250m inflows versus EM outflows of $1.3bn.”

Emerging market stocks hit a six-month low as investors shifted away from these markets on speculation that the Fed would cut back its quantitative easing program, according to BusinessReport. [Single-Country ETFs for Emerging Markets Slammed by Fed Talk]

Turkey shares declined 20% in response to heated protests in Instanbul. [Turkey ETF Down Over 20% in a Month on Protest Fears]

Brazilian stocks have been faltering after stimulus measures failed to meet growth expectations. [Brazil ETFs Lower After Financial Transaction Tax Removed]

Lower commodity prices has depressed Russian stocks – Russia is a major oil exporter. Russia’s “market is struggling to find growth drivers,” Vladimir Bragin, head of research at Alfa Capital, said in a Bloomberg article.

Chinese stocks have weakened on growth concerns, with small-caps leading the decline.

The emerging market economies include countries that are still developing liquidity in local debt and equity markets and some form of market exchange and regulatory body. The emerging markets are typically known for their faster economic growth but come with considerable risk associated with political instability and currency volatility, among others.

Frontier markets, or pre-emerging markets, include countries with capital markets less developed than those found in the emerging markets. While frontier market investors may capitalize on robust returns, these markets also come with considerably higher risks.

The Frontier Market ETF includes country exposure to Kuwait 25.6%, Qatar 17.5%, U.S. 13.5%, United Arab Emirates 13.5%, Nigerai 13.3%, Pakistan 4.8%, Kenya 4.4%, Oman 3.8%, Kazakhstan 3.6% and Argentina 3.4%.

“2013 has been a year in which investors have been pushing the envelope for returns and showing more willingness to venture into less familiar territories,” Morgan Harting, a senior portfolio manager at AllianceBernstein, said in the article. “With growth in emerging markets decelerating in recent years, people who have been investing in this asset class have started wondering where the next big growth story will be, and more are looking at the frontier markets.”

For more information on the frontier markets, 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. 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.