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 :

FM FRN PMNA
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. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  4. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  7. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  8. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
RELATED TERMS
  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. Fractal Markets Hypothesis (FMH)

    An alternative investment theory to Efficient Market Hypothesis ...
  5. Hard-To-Sell Asset

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

    When an investor has essentially risked all of his capital for ...
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
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!