Frontier Market ETFs Deliver Returns

March 27, 2014

Funds like FM and GULF look attractive as an alternative to emerging market exposure.

As emerging markets (EM) have stumbled over the past year, many market strategists have called for a more subtle approach to gaining exposure to the developing world; namely, by picking single countries or regions rather than owning the whole basket.

That makes sense. EM countries in Latin America differ greatly from those in Asia, and the presence or absence of Korea and Taiwan in a broad EM fund, because of index rules, further highlights the need to have something other than a monolithic view of the space.

Clearly a single-country ETF is much less diversified than a multicountry basket, which raises the bar for diligence and research.

ETFs that split the difference—offering a subset of EM countries—combine some diversification with a themed focus, but come with their own bets. For example, ETFs canvassing the BRIC countries of Brazil, Russia, India and China are currently a contrarian play, while the EGShares Emerging Markets Consumer ETF (ECON | C-40) tilts hard toward the EM consumer by design.

As alternatives in this light, I’d offer frontier market ETFs: the iShares MSCI Frontier 100 (FM | D-94) and the WisdomTree Middle East Dividend ETF (GULF | F-89). (More on’s fund scores in a moment.)

Both funds are dominated by Persian Gulf countries; namely Qatar, the United Arab Emirates and Kuwait. They share similar sector exposure too, led by financials, telecoms and industrials, and carry little energy exposure.

Frontier markets sound extremely risky, but the funds’ recent performance has been remarkable, not only in terms of strong returns but also for low volatility.

The chart below shows these two funds held up against an emerging markets proxy, the iShares MSCI Emerging Markets ETF (EEM | B-100). I choose FM’s inception as the start date for the chart since it’s the newest of the three funds.


GULF and FM stand out for strong returns for the period, 61.3 percent and 37.4 percent, respectively, compared with -4.3 percent for EEM.

Both FM and GULF have delivered lower daily volatility for the period compared with EEM, and with the SPDR S&P 500 ETF (SPY | A-98), for good measure.

Volatility FM GULF EEM SPY


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