Frontier Markets ETF: Solid Exposure, Diversified Portfolio

Oct.24.10 | About: Guggenheim Frontier (FRN)

Investors have plenty of regional funds to pick from these days, but it is somewhat surprising that there is still only one truly global "frontier markets" ETF out there.

Guggenheim Frontier Markets ETF (NYSEARCA:FRN) hit the ground in June 2008, when the wheels started coming off the global economy. That somewhat inauspicious start date leaves it with 10% lifetime losses, but YTD performance has been an extremely respectable 20% -- making it one of the top globally diversified funds out there.

The secret of FRN's success has been solid exposure to the world's top-performing markets, which generally happen to be off the beaten path as far as BRIC-heavy portfolios are concerned.

A full 57% of the portfolio is in just four markets of the Latin periphery: Chile, Colombia, Argentina and Peru. With the Chilean market on a record-breaking trajectory this year -- and accounting for 31% of FRN -- and Colombia (12%) holding its title of favorite among many single-country investors, it is no wonder that FRN is delivering the goods.

Holdings tend to be the large-cap names in each country with a strong bias toward resource and banking plays: Ecopetrol SA(NYSE:EC) and Bancolombia S.A.(NYSE:CIB) in Colombia; Enersis S.A. ADR (ENI), Endesa Chile ADR (NYSE:EOC),Chemical & Mining Co. of Chile Inc. (NYSE:SQM),LAN Airlines S.A.(NYSE:LFL),LAN Airlines S.A. (NYSE:SAN); Compania de Minas Buenaventura SA (NYSE:BVN) in Peru.

In theory, an investor could simply buy ADRs or country-specific funds to get exposure to these big Latin stocks.

Much more than a Latin fund, But where FRN really shines is in the other 48% of the portfolio, which is currently allocated to a band of markets ranging from Nigeria up through Central Europe and the Middle East, and on to Kazakhstan. With very few (and thinly traded) exceptions like Orascom Telecom (OTC:ORSTF), these companies are not available to U.S. investors. In many ways, these countries are the BRICs of tomorrow.

If half of FRN is weighted to Brazil's less well known Latin counterparts, the weighting to Poland, the Czech Republic, Ukraine and Georgia provides a much less oil-driven counterweight to Russia-heavy "emerging Europe" portfolios.

Pakistan is a way to play a vast economy very similar to the old India that is already fast disappearing under the pressure of modernization and vast investor capital. While specialized portfolios provide access to Africa and the Middle East, FRN is the only ETF out there that gives investors a way to play them all at once.

Disclosure: no positions