Middle East-focused exchange traded funds (ETFs) have garnered more attention as fears about Dubai escalated. Yet, many investors don’t realize that the region is only one facet of the larger frontier markets category.
Middle East ETFs, such as the SPDR S&P Emerging Middle East & Africa (NYSEArca: GAF), Market Vectors Gulf States (NYSEArca: MES) and WisdomTree Middle East Dividend ETF (NASDAQ: GULF), are a subset of a relatively new class of ETFs called frontier ETFs, remarks Bill Luby for Seeking Alpha. (Dubai worries agitate Middle East).
However, Luby believes that Claymore/BNY Mellon Frontier Markets (NYSEArca: FRN) and PowerShares MENA Frontier Markets (NYSEArca: PMNA) stand out as real diversified frontier plays. (Why frontier markets may be the next big thing).
PMNA is a regional ETF based on the NASDAQ OMX Middle East North Africa Index, with a strong emphasis on the Persian Gulf. Top country allocations include United Arab Emirates (22.6%), Egypt (20.2%) and Kuwait (16.9%). (Four reasons Africa looks appealing).
FRN is a more geographically diversified ETF based on the Bank of New York Mellon New Frontier DR Index. Top country allocations include Chile (28.6%), Poland (15.9%) and Egypt (15.4%).
Additionally, there is the regional frontier ETF Market Vectors Africa (NYSEArca: AFK) and the recently launched single-country ETF Market Vectors Poland (NYSEArca: PLND). (Poland’s growing economy targeted with new ETF). Van Eck is also planning new country-specific ETFs for Egypt and Kuwait.
For frontier markets, the same principles of investing in emerging markets apply: the broader your fund is, the lower your risk. Potential investors should note that frontier markets are considered riskier than developed markets and the multi-country and single-country funds can suffer from low liquidity and high volatility.
Have a strategy for entry and exit in place before you invest to best protect yourself. More information on trend following can be found in The ETF Trend Following Playbook.
For more information on frontier markets, visit our frontier markets category.
Max Chen contributed to this article.