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Frontier Markets ETF Could Soon be a Buy


As if it has not been for much of this year. The iShares MSCI Frontier 100 ETF (FM) is up nearly 18% year-to-date while the two largest emerging markets ETFs are down an average of 2.8%.

FM has outperformed some of the most popular emerging markets ETFs (and plenty of others) as investors have embraced frontier stocks due to low correlations to U.S., European and emerging markets equities. As a group, frontier markets are surprisingly more docile than investors might initially think and flows to Kuwait, Qatar and United Arab Emirates stocks have boosted FM this year.[Frontier Markets ETF More Stable Than Developed Peers]

FM, however, has been sluggish compared to diversified emerging markets ETFs over the past three months. Over that time, FM is up 3.5% while the iShares MSCI Emerging Markets ETF (EEM) has sprinted higher by 8.7%. That does not mean FM is lacking for near-term promise. [Frontier ETFs Leave Emerging Markets in the Dust]

FM “has been tightening up on the weekly chart, with each selloff from swing high to low retracing less than the last,” said Deron Wagner of Morpheus Trading Group.

“After breaking out from a tight range above the 20-day EMA, the price action pulled back to the prior breakout level on declining volume last week,” added Wagner. When a stock or ETF makes a basing formation on low volume, as FM appears to be doing, it can often be a bullish sign.

FM is far from a risk-free play. Potential investors should be aware that frontier markets come with increased risks. For instance, FM’s holdings have higher-than-normal tracking error, are relatively small and are less liquid compared to the large-cap names that are found in so many emerging markets ETFs.

Additionally, some market observers have expressed concern about the future holds for FM now that Qatar and UAE, a combined 32.3% of the ETF’s weight, have been upgraded to emerging markets status. That means the two countries will enter the MSCI Emerging Markets Index next year leaving Kuwait and Nigeria to dominate FM’s country exposure.

iShares MSCI Frontier 100 ETF

Tom Lydon’s clients own shares of EEM.