iShares’ Frontier ETF A Potential Blockbuster
On Thursday, iShares launched its highly anticipated MSCI Frontier 100 Index Fund (NYSEArca: FM), and I think this fund will be a game-changer in the frontier markets investing landscape.
The cap-weighted fund holds 100 of the largest companies from frontier markets, as classified by indexing giant MSCI.
Frontier markets are increasingly sought by investors for a number of reasons. For one, frontier markets are still underdeveloped compared to emerging markets, meaning there’s potential for high growth in an ever-interconnected global economy.
Some frontier markets, such as Nigeria and Kazakhstan, are rich in natural resources, and are riding the current commodities boom. Others—such as Vietnam, Bangladesh and Pakistan—have favorable demographics.
Then there’s the correlation factor, which appeals to investors seeking diversification.
Since many frontier markets are still relatively untapped by investors—mainly due to accessibility and liquidity issues related to the fact that they are nascent financial markets, their returns are less correlated with the broad equity markets.
Just look how much correlations have spiked in the past 10 years between the S&P 500 Index and the MSCI Emerging Markets Index, the underlying index of the other blockbuster, iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).
From 2002-2003, the MSCI EM had a correlation of 0.57 with the S&P 500. Over the past year, its correlation has spiked to 0.838. Meanwhile, over the past year, the MSCI Frontier 100 Index had a correlation of 0.649 with the S&P 500.
Be careful when making fruit-basket comparisons; you’re likely to come up with lemons.
Movers and shakers in the ETF world are often just the opposite.
With the S&P 500 topping 2,000, it’s worth understanding how you ended up in the wrong large-cap ETF.
Pimco is going back to what it does best—generating alpha through fixed-income exposure.