Emerging markets have long been popular investment destinations, as these countries generally offer considerably greater growth potential than more mature markets. Given the lack of emerging market listings on major U.S. exchanges and the difficulties of direct investments in many of these countries, ETFs have become a compelling means of achieving diversified exposure to these markets. For anyone looking to geographically diversify their portfolio, the MSCI Frontier 100 Index Fund (FM, A-) deserve consideration as a go-to option in emerging market ETF investing [see Free Report: How To Pick The Right ETF Every Time].
This ETF is linked to the MSCI Frontier Markets 100 Index, which is designed to select the 100 largest and most liquid offerings of the MSCI Frontier Markets Index. Since inception in September of 2012, FM has accumulated over $22.3 million in total assets and has exhibited relatively solid daily liquidity.
Frontier markets can be thought of as “the other international stock,” covering economies that are even less developed than the Chinas and Indias of the world. These markets are flush with risk (including potentially significant political risk) but offer tremendous long-term potential as well [see FM Realtime Rating].
What Makes FM Unique
FM is the only ETF based upon the MSCI Frontier 100 Index. While FM is not the only frontier market fund any more, its status as one of three does make it relatively uncommon.
FM is also distinct in its holdings and allocations. While FM’s frontier market ETF rivals have fewer than 50 holdings, FM has 100. FM is also considerably more diverse within its ten largest holdings. To a certain extent, then, FM may be a more diversified option for investors [try our Free ETF Head-To-Head Comparison Tool].
How It Fits In A Portfolio
Frontier markets are characterized by their illiquidity and tend to be considerably more volatile than even larger emerging markets. That makes frontier market investing riskier on balance, which in turn argues that FM is more suitable for aggressive, or at least risk-tolerant, investors. While FM could fit into more conservative portfolios as a smaller allocation designed to add growth and provide diversification (frontier markets tend to be less correlated to developed markets), the likely volatility argues against a large allocation for risk-averse investors [see Emerging & Frontier Markets ETFdb Portfolio].
What It’ll Cost You
As a small fund investing in notably illiquid markets, FM has a relatively high expense ratio. At 0.79%, FM is the most expensive of the three frontier market ETFs, and its expense ratio is above the Emerging Market Equities ETFdb Category’s average of 0.64% (with a wide range from 0.15% to 1.29%). FM is not available for commission-free trading.
Under The Hood
As the name would suggest, FM holds 100 positions in its portfolio. More than 40% of the fund is allocated to the fund’s top 10 holdings. Given that there is substantial variance in the liquidity of frontier markets, these funds tend to be relatively concentrated on a country basis, and this fund is no exception–roughly 60% of the fund’s holdings are in the Mideast, with Kuwait, Qatar and UAE comprising more than half of the fund’s holdings.
As is common in emerging market funds, there is also considerable concentration by industry–financials are more than half of the fund’s holdings, with telecom and industrials combining for roughly one-quarter of the holdings [see also 101 ETF Lessons Every Financial Advisor Should Learn].
Yield, Volatility and Performance
FM does not have a quoted yield at present.
Given the very short operating history of the fund, there is likewise minimal information regarding performance and volatility. The underlying index, though, was up almost 9% in 2012, with a three-year return of 4% and a five-year return of -11%. These results are inferior to the broader MSCI Emerging Markets Index (which has reported returns of 19%, 5% and -0.6% over the same periods). Volatility for the underlying index, as measured by standard deviation, was 14.3 over the past three years, against 15.3 for the SPDR S&P 500 (SPY). But as mentioned previously, FM is still a new fund, and its performance figures may change significantly in the future [see FM Returns].
There are two other available ETFs marketing themselves as frontier funds, and numerous emerging market funds (some of which make at least some investments in frontier markets).
- Frontier Markets ETF (FRN): This ETF holds less than half as many stocks as FM and is heavily allocated toward Latin America (over 70% of total holdings), with holdings in Chile accounting for over one-third of the fund.
- MENA Frontier Countries Portfolio (PMNA): This fund likewise holds less than half as many positions as FM, but like FM is heavily allocated to the Mideast; PMNA allocates over 70% of total assets to equities from the region.
Disclosure: No positions at time of writing.