Most passively managed ETFs are designed to track underlying indices and most ETF investors know that. How much time investors spend studying the index an ETF tracks is another matter altogether.

Aside from knowing that Procter & Gamble (NYSE: XOM) in energy indices, index construction is a seemingly unapproachable topic for some.

Index constitution and construction may not give everyone the warm fuzzies, but it is a vital component of successful ETF investing, particularly in foreign markets. That includes frontier markets, which have soared to prominence this year as investors have sought alternatives to disappointing emerging economies.

Related: Frontier Markets ETFs Cheap, Too.

MSCI's (NYSE: FM), was built and what the index will look like in the future following some important changes.

There are, of course, complexities involved in building an investable frontier markets index, including clients' liquidity concerns and ensuring candidate countries even have enough viable options in terms of companies to be possibly included in the index.

"Even in the frontier space, we try to construct indices that are investable," said Lieblich. "Some markets don't meet our liquidity standards. Each country must have at least two companies to be included in the index."

For now, the MSCI Frontier Markets Index is heavily skewed toward the Middle East, a scenario that Liebtich says is "a reflection of the frontier markets opportunity set."

For FM, the frontier ETF, that means Kuwait, Qatar and the United Arab Emirates dominate the fund. Those countries combine for roughly 59 percent of FM's weight. FM will not look that way forever. In fact, the ETF will only look that way until the second quarter of next year because MSCI earlier this year announced Qatar and UAE have been promoted to emerging markets status.

When Qatar and UAE depart for the MSCI Emerging Markets next year, Kuwait alone will be 30 percent of the frontier index's weight with another 20 percent going to Nigeria, Africa's second-largest economy.

Lieblich notes it is "not a subjective decision by MSCI to weight Kuwait at 30 percent," but rather "the result of market structure."

Morocco, Pakistan and Kenya will round out the top-five country weights in the frontier index. Morocco was recently demoted by MSCI from emerging markets status. Pakistan and Kenya currently combine for about nine percent of FM's weight.

Other Markets
While Qatar and UAE have attracted the bulk of the attention among investable frontier markets this year, some investors have become acquainted with other frontier markets over the years, including Argentina and Vietnam.

Those markets are directly accessible through the Global X FTSE Argentina 20 ETF (NYSE: ARGT) and the Market Vectors Vietnam ETF (NYSE: VNM). Vietnam has been the more popular of the two as highlighted by VNM's $358.8 million in assets under management. While Vietnam is in a region chock full of markets investors have previously embraced, such as Indonesia, Malaysia and the Philippines, the market presents its own complexities to investors.

Those include foreign ownership limits, something the government is working to improve. Still, those foreign ownership cap Vietnam's weight in the MSCI Frontier Markets Index.

"Vietnam applies stringent foreign ownership limits," said Liebich. "So the available investable universe for foreign investors is smaller in Vietnam than, say, in Pakistan. If the foreign ownership limits are reversed, it could lead to increased weights for Vietnam in the future."

As for Argentina, once South America's second-largest economy, the country was demoted by MSCI to frontier from emerging status over four years ago. The country accounts for 3.9 percent of FM's weight.

"Argentina was reclassified entirely due to capital controls implemented by the government that hurt foreign investors," said Lieblich. "It was really a situation specific to Argentina, not other markets."

Below frontier status is "stand alone," a group that, according to MSCI's classification methodology, has six countries. Those are Botswana, Ghana, Jamaica, Palestine, Trinidad & Tobago and Zimbabwe. Adventurous investors will like to know that Lieblich said only one of those six has a somewhat reasonable chance of being added to the frontier markets index anytime soon and the second place country on the list is well behind the first for possible inclusion in the MSCI Frontier Markets Index.

For more on ETFs, click here.

Related Articles
  1. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  2. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  3. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  4. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  5. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  6. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  7. Budgeting

    Plated Review, Is It Worth It?

    Take a closer look at the ready-to-cook meal service, Plated, and learn how the company can help you take the hassle out of home cooking.
  8. Investing News

    How China's Economy is Now Like America's

    China's economy could take the global economy down with it; why that might be good news in the grand scheme.
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Chart Advisor

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
Trading Center