Frontier market ETFs have been gaining investor attention as many seek to diversify portfolios and gain exposure to nations and regions that are up and coming and for good reason.
The actual definition of a frontier market is somewhat ambiguous, but they do offer investors the ability to access parts of the world that are likely to witness rapid economic growth in terms of GDP. Another reason to consider frontier markets is due to their low, to no, correlation with emerging and developed markets. This lack of correlation shelters these markets from the wrath that has been brought on by the sovereign debt crisis seen in developed markets throughout Europe as well as the socioeconomic climates of both the developed and developing markets.
Additionally, frontier market nations generally have relatively strong balance sheets with little debt, in relative terms, when compared to more developed nations and are relatively cheap based on long-term fundamentals.
Lastly, frontier markets are worth a look due to their vast supply of natural resources and commodities, such as oil and gold, which are likely to be highly sought after in the coming future.
The most common frontier market regions include Africa, more specifically Egypt and South Africa, the Persian Gulf and Middle East, nations like Kazakhstan and the United Arab Emirates, parts of Eastern Europe, like Poland and parts of Latin America like Bolivia, Peru and Chile.
Some ways to play these markets include the following:
- Claymore/BNY Mellon Frontier Markets ETF (FRN), which holds an expense ratio of 0.65%, a market capitalization of nearly $6 billion and enables one to gain exposure to Egypt, Colombia, Kazakhstan, Chile, Poland, Lebanon, Nigeria, Peru and Oman. The ETF holds 46 stocks and has exposure to financials, metals and mining and telecommunications.
- Market Vectors Gulf States ETF (MES), which holds an expense ratio of 0.98%, a market capitalization of $4.9 billion and is primarily focused on the Middle East and Persian Gulf. Some of the nations represented include Kuwait, Qatar, the United Arab Emirates and Oman. The ETF holds 41 stocks and is heavily concentrated on financials.
- Market Vectors Africa ETF (AFK), which holds an expense ratio of 0.83%, a market capitalization of $6.2 billion and holds 50 stocks with its top holding in the United Kingdom. The ETF gives exposure to South Africa, Morocco, Nigeria and Egypt, in addition to Canada, the United Kingdom and Kuwait. The ETF holds 50 stocks and gives exposure to telecommunications, commodities and financials.
- PowerShares MENA Frontier Countires (PMNA), which holds an expense ratio of 0.70%, a market capitalization of $4.8 billion and is solely concentrated on the Middle East and Persian Gulf. The ETF holds 37 stocks and gives exposure to Kuwait, Jordan, the United Arab Emirates, Morocco, Egypt and Oman. It differs from MES, in that MES has holdings outside of the Middle East.
Although an opportunity may exist in these markets, it is equally important to consider risks such as political instability, weak infrastructure and currency risks that could hinder economic output and performance. In general, frontier markets are much more volatile and less liquid than markets of the developed or emerging world.
A good way to help protect against these risk is the implementation of an exit strategy which identifies when downward price pressure is likely to be seen in these ETFs. Such a strategy can be found at www.SmartStops.net.
Disclosure: No Positions