With slowing economic growth in China, protests in Brazil and other “issues” presenting themselves in a variety of emerging markets, investor have soured on the idea of betting heavily on these nations. Many are concerned that these countries- represented by funds like the Schwab Emerging Markets Equity ETF (NASDAQ:SCHE) –have now matured and will never see the breakneck GDP growth that has been the norm over the last 20 or years.
Given these slower growth predictions from formerly “hot” markets, investors need to look off the beaten path to find the next opportunities in the international world.
SEE: An Evaluation Of Emerging Markets

Welcome To The Frontier  
At one time, emerging markets offered low correlation to the developed world. However, as these nations grew in prosperity, their fortunes became inter-twined with global economy. For example, China is now the United States' second largest trading partner. That’s why investors with long enough time limes may want to look at those nations classified as frontier markets.
Wall Street calls these emerging markets that have not fully emerged, "frontier economies." They include such nations as Vietnam, Nigeria, Croatia and Kazakhstan. Typically, these frontier environments are characterized by very fast growing economies combined with very small or hardly-existent equity markets. Add this to the often unstable political environments, and you have reason why these aren't tourist hot spots.
However, the fact that they are ignored actually makes them good investment candidates.
Many are rich in vital natural resources. Despite recent setbacks in the commodities markets, the long term global demand picture for oil, copper, gold and other commodities is still rosy and continues to increase. Secondly, these nations feature juicy demographics. Frontier markets represent roughly 22% of the world population- with nearly 60% of their citizens under the age of 30. Aside from this large population being young, they also represent a cheaper labor force than those found in other more “developed” countries. That makes them able to compete on a global stage. 

SEE: Forging Frontier Markets
Perhaps the most important reason to consider the frontier happens to be the nation’s low correlations to other asset classes. Over the last 10 years, the MSCI Emerging Markets Index has had a correlation of around 90% with the MSCI Developed Markets Index. This compares with a correlation of just 70% in the 10 years prior. The MSCI Frontier Markets Index has shown just a 0.45 correlation over that time frame. That provides plenty of “zig” when the broad market “zags”. 
Going Off The Beaten Path
While there are a few frontier market ADR's trading on major U.S. exchanges- such as Panama’s Banco Latino Americano de Comercio Exterior (NYSE: BLX) -most do not. Creating an allocation to these assets using individual stocks would be most daunting. For most investors, an index exchange product or actively managed mutual fund is a better choice. These can provide exposure to several different frontier markets, across several different sectors.
The oldest fund in the sector is the Guggenheim Frontier Markets (NYSE:FRN). The ETF tracks 35 different stocks from 10 different frontier nations. However, the major criticism of the ETF is that many of the countries included- such as Chile and Poland- are actually considered emerging markets, not frontier. Investors betting on the fund may not be getting true exposure to the market segment. Given that, the new iShares MSCI Frontier 100 Index (NYSE: FM) is a better bet. 

The iShares fund tracks 102 different firms from such faraway places as Kuwait, Kenya and Vietnam, while including zero exposure to more traditional “emerging” markets. The frontier’s diversification benefits haven’t been lost with the ETF as FM is up 11% year to date. This compares with a 10% loss of for iShares MSCI Emerging Markets (NYSE:EEM). The ETF is expensive- with fees clocking in at 0.79%. However, considering just how illiquid some of these markets are, that might really be a bargain. 
The remaining ETF's in the sector focus on the continent of Africa. The PowerShares MENA Frontier Countries ETF (NASDAQ:PMNA) concentrates its holdings in the oil and energy rich Middle East, while the Market Vectors Egypt Index ETF (NASDAQ:EGPT) and Global X Nigeria Index ETF (NYSE:NGE) can be used to hone in on opportunities in these nations.
The Bottom Line
For investors with a long term- possibly decades- timelines, adding a dose of frontier markets make sense. These emerging nations of tomorrow offer significant growth potential for investors willing to take the risks. Portfolios could be looking at the China's and Brazil's of the future. The previous ETFs – along with the Market Vectors Gulf States Index ETF (NYSE:MES) –make ideal ways to play the nations.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Investing Basics

    Top Tips for Diversifying with Exotic Currencies

    Is there an opportunity in exotic currencies right now, or are you safer sticking to the major ones?
  3. Mutual Funds & ETFs

    The 3 Biggest Mutual Fund Companies in the US

    Compare and contrast the rise of America's big three institutional asset managers: BlackRock Funds, The Vanguard Group and State Street Global Advisors.
  4. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  5. Professionals

    5 Top-Rated Funds for Your Retirement Portfolio

    Mutual funds are a good choice for emotional investors. Here are five popular funds to consider.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!