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Many emerging markets have lost their momentum in 2013 and have largely underperformed since the beginning of the year. In such a scenario, investment in the frontier market has become one of the most alluring options among investors seeking strong returns.
What is a Frontier Market?
Over the past two years, the frontier markets, such as the Middle East, parts of Southeast Asia, South America, and sub-Saharan Africa, are gaining popularity over the developed and developing markets (Time for Frontier Markets ETFs?).
Frontier markets are basically nations less established and developed than emerging nations. They have lower market capitalization and liquidity when compared to the more developed emerging markets, and they are generally at the initial stage of economic, political and financial development.
Rationale Behind Investment
Additionally, the region is characterized by positive demography, unleveraged balance sheets and strong consumption demand. The rising middle class population in the region has resulted in a strong demand for consumer products as well.
The market's young and expanding population is increasingly attractive. Frontier markets represent around 6% of the world’s GPD and 22% of the world population, while approximately 60% of their citizens are under the age of 30.
The population in the region is not just large and young, but they are also a cheaper labor force than those found in developed and emerging markets. Additionally these markets are generally rich in natural resources and have in demand products in this regard (Time to Buy Emerging Market ETFs?).
It is expected that the region will grow at an average of 5% through 2013-2016 on the back of more external inflows and decent commodity demand. So, those seeking long-term high returns should look to invest in frontier market ETFs (4 Excellent Dividend ETFs for Income and Stability).
Risks of Investing in Frontier Market
Though the frontier market provides a good investment strategy for those looking for lofty returns over the long term, a high level of volatility and poor liquidity are risks that run high in these markets. High inflation levels also pose a risk of investing in these economies, as many have trouble keeping this under control.
Frontier Market ETFs
Still, we believe that many frontier markets offer up exciting opportunities to those willing to take on some risk. In light of this, we highlight three ETFs below which target the frontier markets around the world:
PowerShares MENA Frontier Countries ETF (PMNA)
PMNA is based on the NASDAQ OMX Middle East North Africa index, which seeks to track the performance of liquid companies in MENA (Middle East and North Africa) frontier countries.
In terms of country exposure, United Arab Emirates (26.5%), Kuwait (24.4%), Egypt (21.3%) and Qatar (20.6%) account for the majority of asset holdings.
The fund is heavily tilted towards the financial sector that makes up about 62% of the assets (Banking ETFs: Laggards or Leaders?). The top three holdings include National Bank of Abu Dhabi, Emmar Properties and National Bank of Kuwait.
The fund launched in September 2008 and manages assets of $16.2 million currently. PMNA charges fees of 70 basis points per year and has a dividend yield of 2.15% as of now. The fund generated a return of 5.63% in the year-to-date period.
iShares MSCI Frontier 100 Index (FM)
FM – launched in September 2012 – is the newest product in this group. It is based on the MSCI Frontier Markets Index, which is composed of 100 largest securities from the eligible universe, ranked by float adjusted market capitalization.
The fund manages an asset base of $103.9 million and invests this asset base in a holding of 102 securities.
In terms of country exposure, Kuwait (27.3%), Qatar (16.6%) and the Nigeria (13.6%) are in the top three spots. Like PMNA, financials dominates in terms of sector exposure, accounting for a whopping 54% of the total assets, while telecoms (13.1%) and industrials (12.4%) round out the top three (Two Sector ETFs Posting Incredible Gains).
The fund charges an expense ratio of 79 basis points and pays out a 30-day SEC yield of 2.14% currently. The fund generated a return of 13.58% in the year-to-date period.
Guggenheim Frontier Markets ETF (FRN)
For a moral global approach to frontier market investing, investors should focus in on Guggenheim’s entrant in the space. The fund seeks to match the performance of the Bank of New York (BNY) Mellon New Frontier DR Index, before fees and expenses.
The BNY Mellon describes frontier market countries based on the GDP growth, per capita income growth, past and expected inflation rates, privatization of infrastructure and social inequalities.
The top countries included in the ETF are Chile (50.6%), Colombia (14.38%), Argentina (9.27%) and Egypt (5.97%). These account for about 80% of the holdings.
The fund is top-heavy with about 61.3% of the assets in the top 10 companies, while EcoPetrol, Enersis and Latam Airlines are the top three holdings.
With total assets of $145.9 million, the fund is the low cost choice in the frontier space with an expense ratio of 0.65%. The fund generated a negative 8.10% return year to date and has an impressive 3.3% annual dividend yield.
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ISHRS-MSCI F100 (FM): ETF Research Reports
GUGG-FRONTR MKT (FRN): ETF Research Reports
PWRSH-MENA FRON (PMNA): ETF Research Reports
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