With the ETF industry expanding at its rapid pace, issuers have gradually began venturing into more unconventional markets in order to differentiate new products from those already on the market. Many industry leaders have set out to offer greater levels of diversification, particularly in hard-to-reach developingeconomies. But when it comes to this type of exposure, most investors turn only to the most popular emerging markets toround outtheir international equities component. But for those looking to add yet another layer of diversification to their portfolios, frontier markets provide some of the most unique andlucrativeopportunities . Frontier markets can be thought of as "the other international stock," covering economies that are even less developed than the Chinas and Indias of the world. These markets are flush with risk (including potentially significant political risk) but offer tremendous long-term potential as well. Think of these economies as an opportunity to invest in China 20 years ago.According to MSCI, there are 26 countries that are currently classified under the frontier umbrella. Some of the better known frontier markets include Argentina,Ukraine, Croatia, Kenya, Jordan and Pakistan.

Under The Hood: Frontier Market ETFs

Currently, there is only one ETF available on the market that dedicates its assets to a single frontier market: Van Eck's Market Vectors Vietnam ETF (VNM). There are, however, three broad-based ETFs that offer exposure to this particular corner of the market and a close look under the hood reveals some striking differences between these products :

Expense Ratio 0.79% 0.65% 0.70%
Largest Country Kuwait (31%) Chile (38%) Kuwait (21%)
Largest Sector Financials (57%) Financials (33%) Financials (73%)
# of Holdings 100 39 44

First and foremost, geographical allocations vary significantly in frontier market ETFs compared to emerging market ETFs, which typically have similar weightings to specific countries in their portfolios. The newest addition to the frontier market ETF lineup, iShares' FM, is primarily dominated by equities from the Middle East, with Kuwait given the largest weighting, followed by significant allocations to Qatar and the United Arab Emirates.

Although Guggenheim's Frontier Markets ETF (FRN) may sound similar, its portfolio is vastly different from FM. Although it maintains some exposure to the Middle East, FRN focuses primarily on South American countries; Chile makes up roughly 38% of the fund's total assets, while Colombia, Peru and Argentina account for more than a third of the portfolio. PowerShares' MENA Frontier Countries Portfolio (PMNA), on the other hand, features more significant overlap with FM, targeting countries in the Middle East and North Africa.

In regards to sector allocations, all three Frontier Markets ETFs are heavilytiltedtowards financial stocks; FRN allocates more than a third of its assets to this sector, while FM dedicates nearly two-thirds and PMNA over 70%. Another, perhaps surprising, commonality between these funds is that although investments in frontier markets are considered to be riskier than those in emerging markets, the average 200-day volatility of FRN and PMNA are only 12.9% and 24.12%, respectively. For comparison, Vanguard's Emerging Markets ETF (VWO) has a 200-day volatility of 21.39%, while the Emerging Market's ETFdb Category's range is from 12.9% to 32.73% .

For those looking construct an all-ETF portfolio that is tilted towards the world's developing economies, be sure to check out our Emerging & Frontier Markets ETFdb Portfoliowith a free 7-day trial to ETFdb Pro.

Follow me on Twitter@DPylypczak

Disclosure: No positions at time of writing.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  3. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  4. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  7. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  8. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  9. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  10. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  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 >>

You May Also Like

Trading Center