Among international equity exchange traded funds, the iShares MSCI Frontier 100 ETF (NYSEArca: FM) can go overlooked, but the largest frontier markets ETF is enjoying a solid 2018. FM is up about 4%, outpacing domestic and emerging markets benchmarks.
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.
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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. Some data points suggest some frontier markets are poised for growth this year.
Compelling Details for Frontier Markets
“Over half of the frontier EMs on JP Morgan’s Next Generation Market Index (NEXGEM) have seen an improvement in merchandise export growth since the January 2018 edition of the chart pack, over two thirds have seen an increase in FX reserves and three-quarters have seen a fall in consumer price inflation,” said Fitch Ratings in a note out Friday.
The $780.3 million FM follows the MSCI Frontier Markets 100 Index and holds 118 stocks. Argentina and Vietnam combine for nearly 40% of the fund’s geographic exposure. Vietnam is one home to one of this year’s best-performing frontier equity markets.
“In 4Q17, GDP growth picked up across several frontier markets, including Nigeria, Senegal, Zambia, Vietnam, Armenia, Georgia, Belarus, Costa Rica and Jamaica, while economic activity slowed in Jordan, Iraq, El Salvador, Honduras, Mongolia and Namibia,” according to Fitch.
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Argentina could be promoted to emerging markets status when index provider reveals its market classification later this year. 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.
Still, FM’s three-year standard deviation of 11.57% is below the comparable metric on the MSCI Emerging Markets Index.
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