In the last month there have been two exchange-traded funds (ETFs) introduced that focus on the highly sought after "frontier markets". A frontier market can be defined as a country/region that is on the brink of becoming a worthwhile investment opportunity for outside investors. Examples include Northern Africa, Vietnam, Chile, and parts of Eastern Europe.

With the emerging markets outperforming the developed markets over the last five years, is now the time for investors to put their money into these high growth countries, or is the risk of a global slowdown a deterrent? Look back on the performance of the Claymore BRIC ETF (AMEX:EEB), which doubled from its introduction in late 2006 to late 2007.

Benefits of Frontier Markets
The No.1 reason investor turn to frontier market investments is for the growth potential. Consider an investment in China or Brazil 10 years ago; you would be one very wealthy individual if you had the foresight to put money into the now emerging markets. The Brazilian stock index, the BOVESPA, has gained over 600% in the last six years. The same investment in the S&P 500 would have returned approximately 60%.

The other main reason investors should consider the frontier markets is their value for diversification purposes. Due to how many of these countries do not rely on the major countries for their economy, the frontier markets are able to trade independently of the developed nations. (For an introduction to the risks and benefits of these ETFs, read Finding Fortune In Foreign-Stock ETFs.)

Frontier Market ETFs
The first Frontier Market ETF to launch was the Claymore BNY/Mellon Frontier Markets ETF (NYSE:FRN). The ETF is heavily weighted in its top three countries which include Poland (24%), Chile (21%), and Egypt (17%). Diversification between three separate continents is a plus for the ETF; however, the lack of more exposure to Africa is a concern. The only other African country in the allocation is Nigeria, with a small 3% allocation.

Only one of the top ten holdings is traded on a US-based stock exchange, which makes this ETF valuable to the average investor. The one stock that is traded here in the U.S. is Enersis (NYSE:ENI), an electric utility company based in Chile. The stock accounts for 4% of the ETF and was down 2% during the first half of 2008.

Joining FRN is the PowerShares MENA Frontier Countries ETF (Nasdaq:PMNA). The ETF is based on the NASDAQ OMX Middle East North Africa Index. The countries with the largest exposure are Egypt (21%), Kuwait (16%), Jordan (14%), Morocco (14%), and Qatar (13%). The differences between PMNA and FRN are apparent. While FRN diversifies in several different regions of the globe, PMNA is strictly focused on one area. This can be good or bad, depending on the performance of the countries in the Middle East and North Africa.

Future of Frontier Markets
With two very different frontier market ETFs now on the market, do not expect it to stop there. Van Eck and their Market Vectors family of ETFs have filed with the SEC to roll out a number of ETFs focused on specific frontier market regions. Two that are similar to those mentioned above will focus on Africa (proposed symbol: AFK) and the Gulf States (proposed symbol: MES).

When looking at the frontier markets as an asset class in an investor's portfolio, it should not play a major role in your investment strategy. However, putting a moderate portion of a portfolio into the frontier markets could pay dividends over the long-term. One suggestion I can give for the frontier markets is that they will carry even more risk than the emerging markets, but must be viewed as long-term investments just as you would the emerging market plays. With high reward comes above-average risk.

For related reading, check out Diversification: It's All About (Asset) Class.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  2. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  5. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  7. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  8. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. 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 >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... 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!