iShares Refocuses Frontier-ETF Plans

March 27, 2012

iShares scraps earlier plans for hybrid emerging-frontier ETF, plans pure frontier fund instead.

iShares, the world’s largest purveyor of exchange-traded funds, filed what appears to be revised paperwork with the Securities and Exchange Commission to bring to market a fund focused solely on securities from 21 so-called frontier market countries—a change from two months ago when it filed for the MSCI Frontier Emerging Markets Select Index Fund, which featured a hybrid of five emerging markets and 21 frontier markets.

Gone from the new filing are the emerging market countries of Colombia, Egypt, Morocco, Peru and the Philippines, which were in the initial hybrid filing. In addition, the roster of 21 frontier markets was slightly changed, with Bulgaria, Slovenia and Tunisia giving way to Nigeria, Ukraine and Vietnam instead, a comparison of the two filings revealed. The San Francisco-based company also changed the name of the ETF to reflect the tighter focus.

The iShares MSCI Frontier 100 Index Fund uses a representative sampling strategy to track a free-float-adjusted market-capitalization MSCI index designed to measure equity market performance of a subset of 21 frontier market countries that meet minimum liquidity standards.

Frontier markets have been on a roll in recent months as investors appear willing to take on extra risk in exchange for the potential for higher returns in faraway places such as Nigeria.

If it wins approval, the new iShares fund will be first global broad-based frontier markets ETF. The fund will provide exposure to a space that is notably difficult to access. According to IndexUniverse’s ETF Classification System, there are only six frontier market ETFs in existence. Looked at closely, they all are hybrids of frontier and emerging countries—at least based on MSCI’s classification system.

As IndexUniverse ETF Analyst Dennis Hudachek laid out in a blog early this year titled “Frontier ETFs Coming Your Way,” many ETFs call themselves frontier, but it’s hard to see any of the current offerings as purely frontier. That’s because some of the existing funds have misleading names, or hew to a definition of frontier that’s not universal among index providers. That said, MSCI’s country classification system is often regarded as the most influential in the world of indexing.

As of March 1, the underlying MSCI index for the proposed iShares frontier ETF consisted of issuers in the following 21 frontier market countries: Argentina, Bangladesh, Croatia, Estonia, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Mauritius, Nigeria, Oman, Pakistan, Qatar, Romania, Serbia, Sri Lanka, Ukraine, the United Arab Emirates and Vietnam. Component companies include energy, financial and telecommunication services companies, and may change over time.

The iShares MSCI Frontier 100 Index Fund will include a representative sample of securities, and at least 80 percent of the fund’s assets will be invested in the securities of the underlying index and in depository receipts representing the index’s securities.

According to the prospectus, the ETF may invest the remainder of its assets in futures, options and swap contracts.

One of the most significant risks of investing in this fund is that it is focused solely on frontier markets, which may be subject to a greater risk of loss than investments in more developed and emerging markets. These markets are more prone to inflation risk, political turmoil and rapid changes in economic conditions than developed and emerging markets.



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