While U.S. equities have been stuck within range so far this year, frontier market stocks and related exchange traded funds have been quietly outperformed global markets.
Year-to-date, the iShares MSCI Frontier 100 ETF (NYSEArca: FM) rose 11.8%, Guggenheim Frontier Markets ETF (NYSEArca: FRN) increased 7.5% and Global X Next Emerging & Frontier ETF (NYSEArca: EMFM) gained 6.2%. Meanwhile, the S&P 500 Index was up 2.0% and the MSCI All Country World Index ex US was 3.6% so far this year.
Frontier markets include those less advanced capital markets from the developing world with an investable stock market that is less established than those in the emerging markets. Consequently, frontier market stocks are consider much riskier than other global markets and are not for the faint of heart.
The frontier markets are characterized by high volatility and are more illiquid than more developed markets. Investors may also contend with political instability and other risks.
However, these frontier countries have large and growing populations that could translate to huge growth potential. These economies could become the Brazil, Russia, India and China of tomorrow.
According to the World Bank, many of these frontier economies, with the exception of Saudi Arabia, are expected to growth at a faster rate than both emerging an developing economies in 2017. The faster growth rate has also translated well into their equities market as the MSCI Frontier Markets Index has consistently outperformed the MSCI Emerging Markets Index over the past three-year horizon through the end of 2016.
Moreover, frontier markets are not as connected to each other as emerging and developed markets, which are more closely tied to the global economy – the MSCI Frontier Market Index has exhibited a low correlation to both the MSCI Emerging Markets Index and the MSCI World Index. Due to their more isolated nature, frontier markets can be more volatile, but the isolation offers a degree of resiliency in periods of increased global uncertainty, which may further help these economies dodge the storm from President Donald Trump’s protectionist policies in the U.S.
The iShares MSCI Frontier 100 ETF includes exposure to the 100 largest frontier market stocks, including top components like National Bank of Kuwait 6.5%, Kuwait Finance House 5.1% and Viet Nam Dairy Products 4.1%. FM includes a hefty tilt toward Kuwait 22.5%, along with Argentina 17.1%, Pakistan 11.1%, Vietnam 7.8%, Morocco 6.7%, Nigeria 4.9%, Romania 4.6%, Kenya 4.5%, Bangladesh 4.1% and Oman 3.8%. The ETF has a 0.79% expense ratio.
The Guggenheim Frontier Markets ETF provides a more spread out country weight, including Argentina 14.5%, Kuwait 14.3%, Vietnam 10.2%, Pakistan 9.8%, Nigeria 8.9%, Kenya 7.7%, Morocco 7.0%, Oman 6.9%, Romania 6.6% and Panama 4.5%. FRN, though, includes a less diversified basket of 71 frontier market companies. The ETF has a 0.70% expense ratio.
Lastly, the Global X Next Emerging & Frontier ETF is probably the most diversified of the three ETF options, with 203 holdings. However, the portfolio includes about a 73.6% tilt toward emerging markets outside of the main BRICs, South Korea and Taiwan, along with 26.4% in frontier markets. EMFM has a 0.58% expense ratio.