Sate Your Risk Appetite With Frontier Market ETFs

by: Tom Lydon

Were you impressed by your emerging market allocations last year? Well, frontier market ETFs eclipsed those markets and could continue to do so as businesses globalize and commodities get pricier.

Frontier markets are doing better than the emerging markets, reports Mike Hogan at Barron’s.

Need proof?

  • MSCI Barra’s MSCI Frontier Market Index (MXFM) was up 18% in 2010, as compared to the 16% for the MSCI Emerging Market Index (MXEF).
  • Similarly, Guggenheim Frontier Markets (NYSEARCA:FRN) gained 23% in the last year, vs. iShares MSCI Emerging Markets (NYSEARCA:EEM), which rose 8.2% in the same time period.

IMF economists say that, in general, less-developed economies will likely outgrow developed countries through 2050. However, investors need to be aware that such markets also come with increased risks – even more so than the risks that accompany emerging markets. Those risks include political instability, currency fluctuations and corruption. No two countries have all the same risks, though.

The largest and most liquid frontier options are in Central and Eastern Europe and the Middle East. You may also choose to invest in a frontier market ETF as a way to minimize the risk of holding individual assets from single countries.

Potential risks could be diluted by investing in broad ETFs such as:

  • PowerShares MENA Frontier Countries (NASDAQ:PMNA)
  • Market Vectors Gulf States (NYSEARCA:MES)
  • Market Vectors Africa Index ETF (NYSEARCA:AFK)

According to Benzinga, while Barron’s highlights a couple of frontier market ETFs, there are other noteworthy individual frontier-market countries that you may want to consider as well. Just keep in mind that the more narrow exposure, the greater the risk. You can manage risk easily with a simple strategy like trend following.

  • Market Vectors Egypt (NYSEARCA:EGPT). While lack of volume and assets under management may be a concern, the fund offers a great way to access Egypt’s growth outlook.
  • Market Vectors Vietnam ETF (NYSEARCA:VNM). VNM is a highly volatile fund that may be more suitable for active traders. The country provides high growth but comes with high inflation.
  • iShares MSCI Philippines Investable Market Index Fund (NYSEARCA:EPHE). This emerging Asian tiger is a little more stable than Vietnam. Potential investors should note that the fund is heavily weighted toward the financial sector, which is over 42%.
  • WisdomTree Middle East Dividend (NASDAQ:GULF). Benzinga also recommends looking into GULF due to its dividend play and its exposure to rising oil prices.

Max Chen contributed to this article.