Emerging markets often times evoke a mixed response from the global investment community ranging from excitement to trepidation. Given the improvements made by countries classified under this asset class and the diversity in sector exposure compared to a decade ago, there is still quite a bit of apprehension when it comes to investing in them.
This anxiety is raised multifold when investing in frontier markets. This notion is most plainly visible in the asset sizes of the ETFs investing in these instruments.
Losing out on performance?
Among the largest funds investing in the respective regions, the SPDR S&P 500 ETF (SPY) has $242.5 billion under management, the Vanguard FTSE Emerging Markets ETF (VWO) has $60 billion under management, while the iShares MSCI Frontier 100 ETF (FM) has $607.5 million in assets.
If an investor were to allocate their equity portfolio across these three instruments in proportion to the respective assets sizes of these three funds, emerging markets would account for 19.8% of his equity portfolio while frontier markets would form only 0.2%.
But in doing so, one would be losing out on the potential for an outsized fund performance. While emerging markets have stolen the show in YTD 2017, frontier markets have been no slouches either.
The SPY has returned 11.9% in YTD 2017 until August 7, while the VWO has returned 22.8% and the FM has returned 19.5%.
The graph above plots the Guggenheim Frontier Markets Equity ETF (FRN) and the Global X Next Emerging & Frontier ETF (EMFM), apart from the FM and the VWO, and further proves this point. Until August 7, the EMFM and the FRN have returned over 23.5% each in YTD 2017.
Frontier markets which have rocketed this year
Frontier markets of today are deepening their capital markets and improving their macroeconomic fundamentals, making some of them worthy of investment consideration along with emerging markets. Ted Smith from the emerging markets-focused Ashmore Group, recently opined that frontier markets “represent one of the most attractive opportunities for growth and diversification available in the current global environment.”
Frontier markets, especially from Europe, have been on a tear this year. The graph above shows the movement in local indices in Kazakhstan (KASE), Romania (BET), Nigeria, Kenya (NSE 20), and Argentina (Merval).
Investors who have bought into the local equity markets of these countries would have benefitted phenomenally, especially in cases where the US dollar has weakened against their respective local currencies.
But for investors looking for funds listed in the US to invest in these markets, Kazakhstan, Romania, and Kenya from the above list are out of reach.
In the following articles, we’ll be looking at the three frontier markets which can be accessed by US investors via listed ETFs.