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Investing in the Frontier Emerging Markets with ETFs

Stock-Markets / Emerging Markets Aug 06, 2009 - 07:30 AM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleRon Rowland writes: As a Money and Markets reader, you probably know an awful lot about “emerging markets.” They’re the countries that aren’t quite as modernized as the U.S. but are developing fast: China, Brazil, India, Russia, etc.


But there’s another tier further down the pecking order: The “frontier markets.” These countries have developed their capital markets in just the last few years. They’re risky, but the growth potential is huge!

The frontier can be a dangerous place.
The frontier can be a dangerous place.

Until very recently the frontier markets were extremely difficult for Americans to trade. You can’t just log into your online brokerage account and buy a stock in Namibia. Nor should you … the risks are too great.

But now, thanks to exchange-traded funds (ETFs), you can easily buy a diversified portfolio of frontier market stocks in one simple package. More on that in a moment. First …

Where, In This Fast-Shrinking World, Is There Any Frontier Left To Tackle?

Today’s technology means that events in the remotest parts of the world seem only as far away as your satellite dish. So you might think that all of the frontiers have disappeared.

Actually there are several dozen frontier markets. And all of the index providers have their own specific criteria of what kind of countries qualify, with two broad principles in common …

First, frontier markets need to be investable, with a functioning local stock market that accepts foreign investment. Countries that bar foreigners can’t be part of the club.

Second, frontier markets must be smaller and less liquid than the more-advanced emerging markets. This is what gives them such tremendous potential.

The frontier markets are scattered around the world. For instance, you’ll find them in …

Eastern Europe: Bulgaria, Croatia, Estonia, Romania, Ukraine

Latin America: Chile, Jamaica, Peru, Trinidad and Tobago

Africa: Botswana, Ghana, Kenya, Mauritius, Nigeria

Middle East: Bahrain, Jordan, Kazakhstan, Lebanon, Oman, Qatar

Asia: Bangladesh, Cambodia, Sri Lanka, Vietnam

Those are just a few examples. Many are not what you would consider to be tourist spots. They are places of incredible contrast: Stark poverty adjacent to gleaming cities of wealth. But they’re all moving quickly to join the globalized economy.

How You Can Invest In Frontier Markets …

As I mentioned earlier, I think most investors should avoid individual stocks from frontier markets. The risks are just too great unless you’re an expert who is on top of the local situation.

As far as I’m concerned, it’s much safer to go with an ETF that gives you a broad portfolio of stocks from a variety of frontier markets. Here are six ETFs you might want to consider:

  • Claymore/BNY Mellon Frontier Markets (FRN)
  • Market Vectors Africa ETF (AFK)
  • Market Vectors Gulf States (MES)
  • PowerShares MENA Frontier Countries (PMNA)
  • SPDR S&P Emerging Middle East & Africa (GAF)
  • WisdomTree Middle East Dividend (GULF)

All of these funds are fairly new, so don’t expect to see a long-term track record.

The Middle East is filled with frontier markets.
The Middle East is filled with frontier markets.

Also take note that most of the ETFs on this list have a regional focus. The last four specialize in the Middle East, North Africa, or both. This is a reflection of the energy capital that has flowed into those areas over the last few years.

Of these six ETFs, only the FRN has exposure to Asia, the Americas and Europe. Yet the FRN isn’t exactly “balanced.” Just four countries — Chile, Poland, Egypt and Colombia — account for three-quarters of the portfolio. Additionally, these larger positions are classified as “emerging” instead of “frontier” by many other index providers, such as Morgan Stanley Capital International (MSCI).

Keep in mind, as well, that all of these ETFs track indexes of frontier markets. They aren’t actively managed.

Many of the frontier markets are still difficult for U.S. investors to access, but that should change as additional ETFs are introduced. Another thing to remember is that frontier markets are all about risk.

Nevertheless, companies in these places are desperate for investors to help them expand. So if you’re willing to take on the risk of being a pioneer, there’s a chance you’ll be handsomely rewarded in the long run.

Best wishes,

Ron

P.S. I’m now on Twitter! Click here to follow my updates or open your own Twitter account

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