Frontier markets exchange traded funds, led by the iShares MSCI Frontier 100 ETF (NYSEArca: FM), have witnessed a noticeable uptick in popularity this year. From a return perspective, the adulation is well-deserve.
Year-to-date, FM has surged 18.5% while the iShares MSCI Emerging Markets Index (NYSEArca: EEM) is down 4.6%. The PowerShares MENA Frontier Countries Portfolio (NasdaqGS: PMNA), a frontier fund with a heavy emphasis on Middle East and North Africa nations, has 8.5%.
The success of frontier market equities, which hail from countries such as Argentina, Kuwait, Nigeria, Pakistan and Vietnam, is not hard to explain. Global investors see favorable demographics and perceive those nations and others like them to be at similar stages in their growth stories today as China, Brazil, India and others were earlier this century. [Frontier Markets Could Soon be a Buy]
In what is often a surprise to the novice frontier markets investor, these markets are less volatile than emerging markets and usually feature surprisingly low correlations to U.S. and emerging stocks. For example, the standard deviation for FM’s underlying index is below that of the MSCI Emerging Markets Index.
However, some analysts worried that as more international money flows into frontier markets that stocks in those countries will see increased correlations and an uptick in volatility. [Frontier Markets Losing Some Shine]