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Including frontier and emerging markets in your portfolio

Surbhi Jain

Overview: Investing in emerging and frontier markets (Part 6 of 6)

(Continued from Part 5)

A little risk in your portfolio

While those with a smaller risk appetite tend to invest more in blue chip stocks like Apple (AAPL) and Microsoft (MSFT), investors willing to take on additional risk to reap high returns turn to emerging and frontier markets. Several exchange-traded funds (or ETFs) invest in emerging markets, and a small number of ETFs focus in frontier markets.

Emerging market ETFs

In the emerging markets ETF space, Blackrock Capital offers the iShares MSCI Emerging Markets ETF (EEM), which recently posted a one-year return of 20.19%, and has a five-year return of 51.74%. At the same time, the Vanguard FTSE Emerging Markets ETF (or VWO), a popular emerging market ETF from the Vanguard group, recorded 19.99% and 56.84% in one-year and five-year returns, respectively.

Both these ETFs have invested heavily in financial services and technology stocks of emerging Asia, including China and India, and Latin America, specifically Brazil. While the VWO is invested up to 80% in emerging economies, the EEM has a 65% emerging market exposure. Both have their country-wise leading holding in China—nearly 19% and 17%, respectively.

Frontier market ETFs

Blackrock Capital launched the iShares MSCI Frontier 100 Index Fund (FM) in September, 2012. The fund has grown exponentially in value since its inception. The one-year returns recorded by this ETF came to 31.20%, versus the 13.70% returns delivered by the Guggenheim Frontier Markets ETF (or FRN), the frontier market investment option offered by Guggenheim Funds.

Both these ETFs have invested heavily in financial services and energy stocks of frontier markets. While FM is heavily invested in Middle-Eastern stocks, 50% allocation, of companies based in Kuwait and Qatar, FRN leans more towards Latin America, 77% allocation, with its investments in Chile aggregating up to 40.5%. While the FM is invested up to 50% in frontier economies, the FRN has a 98.67% frontier market exposure.

While Guggenheim’s FRN covers virtually all countries that could be classified in the frontier market, Powershares offers several ETFs that focus on specific segments of the frontier markets, such as the MENA Frontier Countries Portfolio (PMNA), which concentrates on the Middle Eastern and North African regions. The ISPX record for the Global X Next Emerging & Frontier ETF (or EMFM) is another ETF providing frontier market exposure.

For the latest trends and updates on emerging markets, visit our Emerging Markets section on Market Realist by clicking here.

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