FTSE Group, the indexing unit of the London Stock Exchange, today introduced the FTSE Frontier Markets Index series. Separate from FTSE’s widely followed developed and emerging markets benchmarks, the new frontier series aims to capture performance among large-, mid- and small-cap companies based in frontier markets.
FTSE’s new frontier indices will initially include nearly 370 companies from 26 countries. Constituent firms are screened for free float and liquidity, ensuring that the indices are relevant to international investors, said FTSE in a statement.
Led by the $812.2 million iShares MSCI Frontier 100 ETF (NYSEArca: FM), frontier markets investing via exchange traded funds has grown in popularity over the past two years. Previously hard-to-access frontier markets have grown in favor among global investors due to favorable valuations, lower correlations to developed and emerging markets equities and, in some cases, lower volatility. [Other Frontier ETFs Feeling the Love]
While many investors have perceived frontier markets to be rife with volatility, FTSE research indicates frontier markets have historically been less volatile than their developed and emerging counterparts.
“A major challenge for investors in recent years has been the rising correlations between asset classes, which have reduced diversification. As the traditional Emerging Markets have developed and become more entrenched in global trade, they have begun to take on similar risk and return characteristics as their Developed counterparts,” according to FTSE.
Despite outperforming emerging markets for the past three years, frontier markets continue sport lower valuations. FTSE Frontier Index has a five-year correlation of just 0.5132 to the FTSE All Cap Emerging Index, according to provider data.
FTSE classifies the following countries as frontier markets: Argentina, Bahrain, Bangladesh, Bostwana, Bulgaria, Croatia, Ivory Coast, Cyprus, Estonia, Ghana, Jordan, Kenya, Lithuania, Macedonia, Malta, Mauritius, Nigeria, Oman, Qatar, Romania, Serbia, Slovakia, Slovenia, Sri Lanka, Tunisia and Vietnam.
FTSE’s classification of Qatar as a frontier market is a departure from rival MSCI (NYSE: MSCI), which upgraded the Middle East nation to emerging markets status. [EM Upgrade Could Send Cash into Qatar Stocks]
“The FTSE Frontier Markets Index Series will provide investors with a comprehensive range of international markets benchmarks. As investment strategies continue to become more global, FTSE’s new series helps market participants to manage Frontier exposure with products based on our strong governance and transparency,” said FTSE Director of Index Research Marc De Luise in a statement.
FTSE has been steadily expanding its index offerings this year. Last month, the company introduced the FTSE Global Factor Index Series, a suite of factor-based global indices focusing on factors such as momentum and value. [FTSE Introduces Global Factor Indices]
In June, FTSE introduced a series of indices that will allow market participants to include China A-shares in global indices at a time of their choosing.
Although FTSE did not say in the statement if its new frontier series will soon by used by ETF providers, some established ETFs are already using FTSE indices to provide frontier exposure. The EGShares Beyond BRICs ETF (NYSEArca: BBRC), which is up nearly 17% this year after hitting an all-time high last Friday, tracks a FTSE index that provides non-BRIC emerging and frontier markets exposure. [Beyond BRICs ETF Hits $250M in AUM]
Over 100 North American ETFs track FTSE indices, including well-known names such as the iShares China Large-Cap ETF (NYSEArca: FXI) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO).