Despite the recent sideways trading, frontier market exchange traded funds have been outperforming other areas of the world and still provide investors access to strong growth opportunities.
The iShares MSCI Frontier 100 ETF (NYSEArca: FM) has remained relatively flat over the past three months but the fund increased 16.4% year-to-date. Meanwhile, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) is up 8.5% year-to-date. [Another Frontier ETF Makes Its Presence Felt]
“Frontier markets offer investors very strong growth opportunities, underpinned by strong demographics, under-penetration of consumer goods, service and products and a resource opportunity both in the physical resources and the human capital resources,” Michael Levy, manager of the Baring Frontier Markets Fund, said in a Morningstar article.
Compared to the emerging and developed markets, the frontier market has not reacted as violently to major political risks, notably the escalating tensions between Ukraine and Russia.
“In frontier markets political risk has also been discounted to a certain extent,” Levy added. “Investors are very keen on the growth opportunities in frontier markets and are prepared to look at some of the political risk given the opportunity.”
The frontier market, though, has remained range bound as problems in Pakistan experienced a near-term correction and issues in Argentina, namely the country’s debt problems, had a small negative impact. Pakistan makes up 7.2% of FM’s underlying holdings and Argentina is 8.0%.
In Nigeria, which now makes up a 14.0% position in FM, saw its market shrink by an record N186 billion, or $1.15 billion, over August, Leadership reports. The Global X Nigeria Index ETF (NYSEArca: NGE) declined 1.5% over the past month. [Nigeria ETFs Get a Lift From Frontier Index Changes]
Levy also argues that the frontier markets show relatively cheap valuations. For instance, FM’s stock portfolio shows a 12.4 price-to-earnings ratio and a 1.8 price-to-book. In comparison, the S&P 500 shows a 17.0 P/E and a 2.3 P/B.
iShares MSCI Frontier 100 ETF
For more information on frontier economies, visit our frontier markets category.
Max Chen contributed to this article.