Emerging market investing has taken off in recent years, as investors have sought out sources of high growth that developed economies simply cannot offer. But while investing in these developing economies has become relatively commonplace, frontier market investing is still in its formative stages.
This guide is meant to serve as an introduction for anyone interested in learning more about frontier market investing.
What Are Frontier Markets?
Frontier markets are economies that are developing, but are still too young to be considered a traditional emerging market. The lines between a frontier and emerging market are somewhat subjective (with major institutions differing on which countries they define as frontier), but MSCI currently classifies 33 nations as “frontier markets.” These countries typically have a great deal of political instability but carry the potential for big growth.
From an investment standpoint, these markets have become more popular among investors searching for long-term growth. The nations are currently illiquid with low market capitalizations, but the risk/reward trade off is quite high, as the nations have the potential for high growth in the coming years.
When it comes to actually investing in these economies, the choices are still limited, as gaining access to companies in these hard-to-reach markets has proven to be something of a headache. Enter ETFs, as these products are slowly but surely dissecting the frontier world, just as they once did for traditional emerging markets.
Investing in Frontier Markets with ETFs
There are a handful of ETFs currently on the market that focus on these nations, with some featuring broad-based exposure and others honing in on a particular region. Here are the three broad frontier market options:
- iShares MSCI Frontier 100 Index Fund (FM ): This is by far the most popular frontier market ETF currently on the market. Debuting in 2012, this ETF spreads its assets all across the frontier world with a tilt towards financial services companies.
- Next Emerging & Frontier ETF (EMFM ): Global X rolled out this fund in late 2013 and rather that exclusively featuring frontier markets, EMFM holds a mix of nations, including smaller emerging markets to give investors a diversified basket.
- Frontier Markets ETF (FRN ): Despite its debut in mid-2008, this is the least popular broad-based frontier market ETF in terms of AUM. The fund is heavily skewed towards Latin America with Chile and Argentina accounting for over one-half of the fund’s total holdings.
Beyond the broad options, there are several funds that keep their focus on a particular country or region:
- Market Vectors Vietnam ETF (VNM ): Launched in 2009, this is the first and only fund to wholly allocate its assets to Vietnam. VNM has hit home for many investors as it has been able to gather an impressive $500 million in assets.
- Market Vectors Gulf States Index ETF (MES ): This fund keeps its gaze set on the Middle East, investing in a basket of nations (like the UAE, Qatar, and Kuwait), the majority of which fall under the frontier moniker.
- Global X Nigeria Index ETF (NGE ): Like VNM, NGE is the first and only fund dedicated to the frontier market of Nigeria. The fund hit the market in early 2013.
- FTSE Argentina 20 ETF (ARGT ): Latin America has become a popular region for investors seeking high growth, with ARGT as the only product that offers a pure-play on Argentinian equities.
The Bottom Line
Issuers have shown a clear interest in expanding the suite of frontier markets offerings in recent years, and if the emerging market ETF space is any indication, they will continue to do just that. There are plenty of opportunities for issuers to offer exposure to new markets and to move beyond just equity investments. Keep an eye on the frontier world in the coming months and years, as the options you have at your fingertips will surely expand.
Follow me on Twitter @JaredCummans
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Disclosure: No positions at time of writing.