An oft-made comparison last year was that of the performance of emerging markets against frontier markets. More specifically, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) against the iShares MSCI Frontier 100 ETF (NYSESArca: FM).
It really was not much of a comparison as FM gained 23.7% while EEM and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) lost 3.7% and 4.9%, respectively. FM was boosted last year as investors have embraced frontier stocks due to low correlations to U.S., European and emerging markets equities. As a group, frontier markets are surprisingly more docile than investors might initially think and flows to select Middle East markets. [Frontier Markets Could Soon be Buys]
It is still early in 2014, but the trend is repeating as FM is up 1.8% while EEM and VWO are each down more than 3%. FM is again trumping its emerging rivals despite the looming loss of Qatar and the United Arab Emirates to emerging markets status. Those countries will join the MSCI Emerging Markets Index in the second quarter. [Volatility Could Rise in Frontier Markets]
For now, Qatar and UAE combine for 33.6% of FM’s weight and that is a good thing as the markets are the fourth- and fifth-best performers in the world to start the new year, according to Bespoke Investment Group.
Some market participants remain bullish on frontier markets. For example, Marko Dimitrijević of Everest Capital compared frontier markets to what emerging markets looked like before scores of investors got involved.
Frontier markets are “a secular opportunity that reminds us very much of what now-mainstream emerging markets were like 15 or 20 years ago. If we’re right, they will enjoy a decade of outperformance versus developed and larger emerging market cousins,” Dimitrijević told CNBC.
Investors may want to heed Dimitrijević’s advice. Everest Capital Global added 41.2% last year while a vast majority of hedge funds lagged the S&P 500 and the firm’s frontier markets fund, Everest Capital Global, gained almost 29%, according to CNBC.
Year-to-date, three of the top-10 global markets are frontier markets. Pakistan is the other in addition to Qatar and UAE. Pakistan is FM’s sixth-largest country weight at 4.41%.
iShares MSCI Frontier 100 ETF
Tom Lydon’s clients own shares of EEM.