Frontier Market ETFs: A Hidden Treasure

By Kevin Grewal

As talks about asset bubbles, oversaturation and over pricing loom over emerging markets, like Brazil, India and China, frontier markets might just be a diamond in the rough. 

According to the International Monetary Fund, 17 out of the 20 fastest expanding economies are considered to be categorized under frontier markets.   Frontier markets can be defined as developing markets which are at a much earlier stage of economic and financial market development than emerging markets.  Some examples include Qatar, Uzbekistan, Pakistan, Vietnam, Argentina, Chile, Ghana and Angola.

One reason these markets are attractive is because they were protected from the global credit crisis because they didn’t have access to Western finances.  Another reason the segment has appeal is strong macroeconomic growth and rapid economic development which generally translates into higher earnings potential for domestic companies and investors. 

Thirdly, frontier markets offer a diversification hedge for many investors in that they offer opportunities to exploit growth dynamics which do not correlate with developed nations.   Additionally, growth in China and India is likely to trickle down and have a domino effect in some these frontier nations enabling them to reap benefits.  This trend is already starting to emerge as many of these countries are witnessing an expansion in their middle class which is increasing spending power and consumer consumption.

Lastly, some suggest that these some of these markets are undervalued as that they are rich in natural resources and commodities while carrying low labor costs.  In fact, Ghana is the world’s second largest cocoa producer, Angola is the largest crude oil producer in Africa, Qatar has an ample supply of crude oil and natural gas and Chile is known for its copper production. 

Although there appears to be upside potential in frontier markets, it is equally important to consider the risks that are involved.  These markets tend to be smaller than traditional emerging markets causing liquidity concerns and making it difficult to exit a position quickly, they are often politically corrupt and infrastructure remains poor making it hard for these underdeveloped nations to sustain economic prosperity. 

At the end of the day, the global economic downturn has likely paved a path for opportunity in frontier markets and they can be accessed in the following ways:

  • Claymore/BNY Mellon Frontier Markets ETF (FRN), which is the most diversified of the frontier funds.  FRN allocates the majority of its assets to Chile, Egypt and Poland
  • PowerShares MENA Frontier Countries ETF (PMNA), which is heavily concentrated in the Middle East with nearly 60% of its assets allocated to Egypt, the United Arab Emirates and Kuwait
  • Market Vectors Africa ETF (AFK), which concentrates on Africa and allocate a significant portion of its assets to South Africa. 
  • WisdomTree Middle East Dividend (GULF), which is focused on oil rich nations like Qatar, the United Arab Emirates and Kuwait

To help mitigate these risks, the use of an of an exit strategy which triggers price points which represent abnormal price weaknesses and an increased likelihood that further price weaknesses in these ETFs are likely to follow is of importance.  Such a strategy can be found at

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