As exchange traded funds (ETFs) expand into “frontier markets,” the credentials or definition of a frontier economy is somewhat unclear.
Marc de Luise of IndexUniverse recently discussed frontier markets and examined a classification system in which frontier markets seem somewhat defined and outlined.
He first looked at the term “frontier” and felt that it was an appropriate name for the countries investors turn to for portfolio diversification. These markets are often characterized by high volatility, low liquidity, and sometimes outstanding performance returns.
The term “frontier markets” seems to have an underlying connotation of an exotic set of markets beyond the “emerging markets.” These frontier markets imply both higher levels of risk and higher levels of return. Also, they have a low correlation to emerging and developed markets. Despite this, there really is no distinct definition of what a frontier market is, especially in the world of financial products and indexing.
There is a system in place that does try to differentiate between frontier markets and its emerging and developed counterparts. In 2003, FTSE created a global standard classification system by conducting a public consultation with more than 100 global investment firms. In the pursuit of a global classification, FTSE was able to develop classification qualities of frontier markets.