U.S. Markets closed

Middle East Exposure Supports Frontier Market ETFs


The emerging markets have been weighed down on speculation of an end to easy money, growing current account deficits and political problems. However, pre-emerging, frontier market exchange traded funds have held up surprisingly well.

Frontier countries are characterized by their early stages of economic development. Consequently, these markets are less established and less developed than the emerging markets, according to Zacks.

Despite the risks and volatility associated with a developing economy, these countries offer attractive growth opportunities. Frontier markets show low correlation to developed markets. The pre-emerging economies also have relatively lower valuations and higher income yield.

Frontier market related ETFs have outperformed due to their large Middle East country allocations and financial sector tilt. These countries tend to peg their currencies to the U.S. dollar. Consequently, their currencies have held up while many other emerging market currencies faltered. [Global X Could Unveil Combo Emerging/Frontier ETF]

Moreover, the MSCI recently promoted the United Arab Emirates and Qatar to emerging market status, which helped attract large capital flows into the Middle East. [Frontier ETFs Leave Emerging Markets in the Dust]

The iShares MSCI Frontier Markets 100 ETF (FM) tries to reflect the performance of the MSCI Frontier Markets 100 Index, which consists of the 100 largest securities taken from the MSCI Frontier Markets Index.

FM has a 0.79% expense ratio and is up 14.7% year-to-date.

The fund holds 100 components, and the top holdings include the National Bank of Kuwait 6.5%, Mobile Telecommunications 5.6% and Kuwait Finance House.

Top sectors include financials 55.9%, telecom 14.3% and industrials 11.3%.

Country allocations include Kuwait 26.6%, Qatar 19.8%, UAE 14.2%, Nigeria 11.6%, Pakistan 4.8%, Argentina 4.5%, Kenya 4.1%, Oman 3.8%, Kazakhstan 3.4% and Vietnam 1.8%.

The PowerShares MENA Frontier Countries Portfolio (PMNA) tries to reflect the performance of the NASDAQ OMX Middle East North Africa Index, which tracks companies in MENA frontier market countries.

PMNA has a 0.70% expense ratio and is up 7.4% year-to-date.

The fund has 43 components, and the top holdings include Citadel Capital SAE 10.9%, Union Land Development 7.4% and National Bank of Kuwait 7.4%.

Top sectors include financials 74.4%, telecom services 13.6% and industrials 7.5%.

Country allocations include Kuwait 24.0%, UAE 17.2%, Egypt 16.5%, Qatar 14.9%, Bahrain 10.5%, Oman 9.4% and Jordan 7.4%.

For more information on pre-emerging 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. 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.