Jim Rogers made headlines this week when he suggested that frontier markets are the next big investment opportunity. In the interview, he was quoted as saying that Myanmar and North Korea looked attractive and that positive things are happening in these countries. While the famed commodities investor has made some very prescient calls in the past, I am questioning the ability for a retail investor to access these secluded markets.
If North Korea is the last untapped investment opportunity in the global market, then we may be in bigger trouble than I thought.
Frontier markets are generally known as countries with questionable political and economic stability. Often times they are in remote geographical regions and are relatively difficult for foreign investors to access. They may also have unique national and corporate laws that make foreign investment a tough pill to swallow. However, it is those very factors that also give these markets a unique edge in upside potential when compared to developed or emerging markets that may have already taken off.
The two largest frontier market ETFs that are available to investors today are the iShares MSCI Frontier 100 ETF (FM) and the Guggenheim Frontier Markets ETF (FRN). While these two funds are similar in name, their underlying holdings and country allocations are vastly different which has led to a noticeable divergence in their total return.
The three largest country weightings in FM are Kuwait, Qatar, and the United Arab Emirates which combined make up more than 59% of the fund's total assets. Clearly this fund is skewed towards countries in the Middle East which may be more suitable for investors trying to access stocks in that region. By contrast, the top three country weightings in FRN are Chile, Colombia, and Argentina which make up 74% of the 34 securities in this fund. The heaviest sector weighting in both ETFs is financials.
A quick look at a comparison of the two frontier ETFs over the last 52 weeks shows just how important the security selection and country weightings have been. FM has jumped nearly 19% over the last year, while FRN has lost more than 13%. This is particularly impressive when you take into account that the majority of the countries that make up FM were in close proximity to the threat of conflict with Syria earlier in the year.
Another interesting comparison is that FM has handily beaten its emerging market counterpart in the iShares MSCI Emerging Market ETF (EEM) over the same time frame. EEM has only gained a paltry 2% over the last year despite its more recent strength.
Although none of the ETFs that I screened had any exposure to the countries that Jim Rogers specified, there is clearly money to be made in frontier markets with the right research and security selection. Although I would definitely consider pairing any allocation to this market segment with broader developed or emerging market indexes to diversify your exposure.
In addition, it should be noted that frontier markets will likely experience periods of high volatility in response to shifting socioeconomic variables. Remember that if you do decide to make an allocation to this sector that you do so with a risk management mindset that takes into account a sell discipline to protect your hard earned nest egg.
Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.