With emerging markets equities looking strong, investors may also want to consider frontier markets, an asset class accessible with various ETFs, including the iShares MSCI Frontier 100 ETF (NYSEArca: FM).
FM was an admirable performer last year, gaining 36.2% while the MSCI Emerging Markets Index jumped 37.3%.
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.
“Economic performance across frontier emerging markets generally remained positive 2H17 as the global economy continued to strengthen and hard commodity prices increased,” said Fitch Ratings. “Several countries saw rising GDP growth in 3Q17, including Nigeria, Ghana, Tunisia, Senegal, Mongolia, Vietnam, Belarus, Paraguay, Bolivia and Jamaica, although economic activity slowed in Sri-Lanka, Ecuador, Georgia, Belize, Cote d’Ivoire and Kenya.”
FM, which tracks the MSCI Frontier Markets 100 Index and has nearly $740 million in assets under management, is dominated by three countries. Argentina, Kuwait and Vietnam combine for over 54% of the fund’s weight. Argentina could possibly be upgraded to emerging markets status later this year after missing out on that promotion last year.
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.
Additionally, frontier markets can be less volatile than their emerging counterparts. For example, FM had lower annualized volatility in 2017 than the MSCI Emerging Markets Index.
“Over two-thirds of 31 frontier EMs on JP Morgan’s Next Generation Market Index (NEXGEM) have seen an improvement in industrial production and merchandise exports since the previous edition of the chart pack published in October 2017 and over half have seen an increase in foreign exchange reserves,” according to Fitch.
For more information on the ETF market, visit our ETF performance reports category.