The Ongoing Allure of Frontier Markets

March 31st at 7:30am by Tom Lydon

Emerging markets exchange traded funds are starting to make a comeback. How long the rebound lasts is up for debate, but the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is up 3.2% over the past month.

EEM and rival ETFs still have a long way to reclaim lost glory. Diversified emerging markets ETFs still have a long way to catchup to frontier funds such as the increasingly popular iShares MSCI Frontier 100 ETF (NYSEArca: FM). FM is up 7.1% while EEM is higher by just 1.4%. Last year, FM, the largest frontier ETF, surged 23.7% while EEM shed 3.7%. [Frontier ETFs Have Plenty of Fans]

“Asset managers are buying frontier markets as they seek to mitigate risk by investing in securities that don’t move in lockstep with global stocks,” report Boris Korby and Callie Bost for Bloomberg, citing David Wickham, a senior product specialist at HSBC Global Asset Management.

One source of allure for frontier markets is that these markets, which include the likes of Kuwait, Nigeria and Vietnam, are not closely correlated to U.S. and emerging markets equities. FM’s underlying index, the MSCI Frontier Emerging Markets Index. has a five-year correlation coefficient of 0.63 relative to the U.S. benchmark equity gauge, compared to 0.76 for MSCI’s emerging markets index, according to Bloomberg.

Frontier stocks are also surprisingly less volatile than some investors perceive them to be. FM’s beta against the S&P 500 is just 0.71, according to iShares data. The ETF hit consecutive all-time highs last Thursday and Friday.

FM is not the only frontier fund that investors have allocated cash to this year. The EGShares Beyond BRICs ETF (NYSEArca: BBRC) has taken in over $23 million. BBRC is a combination emerging/frontier ETF and tracks an index that allows for a quarter of the fund’s holdings to be frontier markets plays.

    Next Page >>