iShares added to its lineup of more than 200 exchange-traded products last week with the launch of its first fund targeting economies that are one run below emerging markets. The new iShares MSCI Frontier 100 Index Fund (FM) will hold approximately 100 of the largest frontier market stocks, delivering access to an asset class that often receives little or no weighting in long-term portfolios [ETFdb Pro members can see the Frontier & Emerging Markets ETFdb Portfolio, which is up about 14% so far in 2012; get full access to 40+ model portfolios with a free 7-day trial to ETFdb Pro].
The investment thesis behind frontier markets is relatively straightforward; these markets are in the position that economies such as China and Brazil found themselves in a few decades ago–with the potential to realize tremendous rates of expansion in the coming decades as basic infrastructure is put in place and relationships with external trading partners strengthen. Of course there is considerable risk that comes with this opportunity; frontier markets are often extremely volatile, and can expose investors to major geopolitical-related instability.
Under The Hood
The FM portfolio will be heavy on the Middle East; Kuwait (31%), Qatar (16%), and the UAE (12%) are the three largest individual country allocations. Other frontier markets comprising the portfolio include Nigeria, Pakistan, Argentina, Bangladesh, Vietnam, Kenya, Sri Lanka, Lebanon, and Croatia. With the exception of Vietnam, none of the countries represented in FM are accessible through a “pure play” single country ETF (VNM, which targets the Vietnamese economy, has turned in some impressive results over the past few years)
[Use the ETF Country Exposure Tool to find ETFs with major weights in dozens of different countries]
Like many international ETFs, FM will have a hefty allocation to financials at slightly more than 50% of the overall portfolio. Because banks are often the largest companies in frontier markets, these stocks tend to receive significant allocations in cap-weighted indexes. Among the largest individual holdings are National Bank of Kuwait (8%), Kuwait Finance House (3.8%), and Qatar National Bank (3.5%).
FM is light on exposure to health care (less than 1%), utilities (about 1.6%), and consumer stocks (about 3% of total holdings).
[see the FM fact sheet for more detail on holdings]
Frontier Market ETFs
|Largest Country||Kuwait (31%)||Chile (38%)||Egypt (22%)|
|Largest Sector||Financials (57%)||Financials (35%)||Financials (71%)|
|# of Holdings|
FM is not the first of its kind; there are two existing ETFs that offer access to frontier economies:
- Guggenheim Frontier Markets ETF (FRN): This ETF may sound similar, but has a portfolio that is very unique from FM–at least from a geographic perspective. Whereas FM is heavy in the Middle East, FRN focuses primarily on South America; Chile and Colombia make up about half the portfolio, with some African economies also included.
- PowerShares MENA Frontier Countries Portfolio (PMNA): This ETF offers features more significant overlap with the recently launched FM; PMNA targets frontier markets in the Middle East and North Africa regions.
In addition, EGShares recently launched its Beyond BRICs ETF (BBRC) that includes a number of frontier economies in its portfolio, along with emerging markets that are not Brazil, Russia, India, or China.
Disclosure: No positions at time of writing.