Frontier market exchange-traded funds make it easier than ever to access these once elusive, high-stakes economies. But before buying, investors should look under the hood, as not everything is always as it seems.
Frontier markets are more accessible than ever, thanks to a growing lineup of exchange-traded funds. But the current crop of ETFs is uneven, with two funds by Van Eck the only ones that come close to delivering on their promise of distilled investment exposure in this high risk/high reward sector.
The problem is that although several products position themselves as "frontier market funds," many have significant emerging market holdings. Emerging markets tend to be more stable and developed than frontier markets, and also have higher correlations to developed markets.
And that’s the rub. As thinly as frontier-market stocks might trade, and as fraught with geopolitical and economic risk countries in that sector might be, they represent a viable way for investors to diversify their portfolios precisely because they have low correlations to emerging or developed markets. They are usually full of natural resources too, fueling and echoing growth in places like
"It doesn't mean you can't benefit from these funds," says Alec Young, international equity strategist for S&P Equity Research. "You just have to be careful with what you're buying."
MSCI and FTSE have both released lists of countries designated as "frontier markets," with much crossover between the two. The MSCI classification, which comprises 25 countries, is more inclusive than FTSE’s, and includes countries like
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Van Eck’s fund, the Market Vectors Vietnam ETF (NYSEArca: VNM) is the sole single-country frontier market security currently available. The Southeast Asian country’s economy is booming, with growth this year projected to be between 6.5 percent and 8.2 percent, according to the World Bank. Also, its population of 86 million has an average age of less than 25, which means labor and social-service costs are likely to be relatively low, as more people enter the workforce than leave it.
VNM has returned 3.14 percent so far this year and 11.5 percent since inception—broadly similar to the MSCI Frontier Markets Index, but with almost four times as much volatility. So far, VNM has $123.5 million in assets.
VNM, which launched last August, tracks a benchmark of both Vietnamese and non-Vietnamese companies generating at least half their revenues from the country. About 70 percent of the index is currently invested in Vietnam-domiciled companies.
Its annual cost to investors is 0.99 percent, compared with 0.65 percent for the MSCI Brazil Index Fund (NYSEArca: EWZ) and 0.55 percent for the MSCI Australia Index Fund (NYSEArca: EWA)—two popular ETFs from iShares that hone in on single countries in emerging markets and developed markets, respectively.
ETF fees tend to get higher the more remote and difficult to access given target markets are.