Frontier markets are usually perceived by investors to be less stable, more volatile, higher risk bets than their emerging markets counterparts. And it is all but a foregone conclusion, at least to some investors, that frontier markets are far riskier and more volatile than developed markets.
Perception does not always translate into reality and the reality is the iShares MSCI Frontier 100 ETF (NYSEArca: FM) has not only been a solid performer this year, but it also has not been nearly as volatile as perceptions of frontier markets imply. FM has climbed 15.5% this year with volatility of 12.6% compared to a 5.2% loss for the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO). VWO, the largest emerging markets ETF, has 19.1% volatility this year, according to ETF Replay data.
FM also stacks up favorably against the iShares MSCI ACWI ETF (NasdaqGS: ACWI), having slightly outpaced ACWI while being only marginally more volatile. All of that from ETF that allocates 70% of its weight to Kuwait, Qatar, the United Arab Emirates and Nigeria. [Middle East Exposure Supports Frontier Markets ETF]
On their own, those markets can be volatile, but put together, they are not as gut-wrenching as one might think. “Each of these markets is volatile,” BlackRock’s Sam Vecht told TrustNet. “There are great risks in investing in these individual markets, but when you build a portfolio, they don’t move together.” Vecht manages the BlackRock Frontier Investments Trust.
Vecht said on a collective basis, frontier markets are more stable than the U.S., U.K. or Europe, adding that “When the global money which drives emerging markets gets worried, investors sell out and they all go down together. But frontier markets are very different.”
There is something to the notion that frontier markets function on their own vacuum. FM was certainly a better place to hide than VWO when tapering chatter increased. From May 22, the day the tapering conversation really started, through the end of August, VWO plunged 12.3%, but FM lost just 1.8%. FM also outpaced ACWI over the same time. [Frontier ETFs Leaving Emerging Rivals in the Dust]
Vecht did caution that the time is now to invest in frontier markets because as more Westerners learn of the advantages offered by these markets, volatility will increase. Like FM, Vecht’s BlackRock Frontier Inventories Trust is heavily allocated to the Middle East and Africa.
However, FM will look different in the second quarter of 2014 because index provider MSCI has promoted Qatar an UAE to emerging markets status. When those countries, nearly half of FM’s weight could be allocated to just Kuwait and Nigeria. FM currently has a 30-day SEC yield of 4.58% compared to 1.83% for the iShares Emerging Markets ETF (NYSEArca: EEM), according to iShares data.
FM debuted just 54 weeks ago and already has over $300 million in assets under management.
iShares MSCI Frontier 100 ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.