I’m often on the road, meeting with clients who want our views on where global economies and markets might be headed. One region I have been getting a lot of questions about lately has been frontier markets. You can think of them as “pre-emerging markets,” the emerging markets of tomorrow, the future potential growth engines of the world. We believe these developing economies offer significant long-term growth potential as well as diversification benefits thanks to their relatively low correlation to many major asset classes, among other reasons.
My colleague Russ Koesterich has made a strong case for taking a small strategic position in frontier markets. And with valuations at attractive levels compared to developed markets, we think it’s a good time to consider stepping in.
How to Explore the Next Frontier
As the interest in frontier markets has grown, so have the options for accessing them. However, not all frontier market funds are created equal, and the relative newness of the asset class translates into significant differences between funds. For investors looking to break into this space, we’d like to suggest the iShares MSCI Frontier 100 ETF (FM). Here are some reasons why we think it’s a good way to access these markets:
1. It offers pure frontier markets exposure. Many other mutual funds and ETFs in the category blend both frontier and emerging markets exposure. For example, countries such as Mexico, Chile, and Colombia, which are classified as emerging markets by MSCI, make up large exposures in some frontier-only funds.
2. It is well diversified. FM allows greater exposure to over 20 countries, whereas some frontier funds have over 40% in a single country. This translates into considerable concentration risk. While FM has a large exposure to financials, it’s important to remember that most emerging and frontier market funds have the biggest weight to this sector because it’s one of the first areas to modernize in developing economies. Additionally, frontier market counties have exhibited very little correlation to each other*, so the risk of a widespread banking downturn should be lower than in developed markets.