Frontier markets include countries that are in the earliest stages of political and economic development. They exist in contrast to emerging market economies, which are further along in implementing economic reform programs that can lead to higher rates of growth. While frontier markets present significant risk, the potential rewards are faster rates of economic growth in dynamic economies that are characterized by vibrant, youthful populations.
There are two exchange traded funds (ETFs) that focus on the most attractive frontier markets around the world. Here we look at the iShares MSCI Frontier 100 ETF (FM), managed by BlackRock Fund Advisors, and the Global X Next Emerging & Frontier ETF (EMFM).
- Frontier markets are characterized by youthful populations and high rates of growth and stand in contrast to emerging markets, which are further along in their economic development.
- The iShares MSCI Frontier 100 ETF has invested in frontier markets such as Kuwait, Vietnam, Morocco, Kenya, Romania and Nigeria.
- Top geographic allocations for the Global X Next Emerging & Frontier ETF are Saudi Arabia, Thailand, Indonesia, Malaysia and Mexico.
iShares MSCI Frontier 100 ETF
The iShares MSCI Frontier 100 ETF (FM) aims to match the performance of the MSCI Frontier Markets 100 Index, which consists of securities from 13 countries: Bahrain, Bangladesh, Jordan, Kazakhstan, Kenya, Kuwait, Mauritius, Morocco, Nigeria, Oman, Romania, Sri Lanka and Vietnam.
The fund has returned 3.03% annually since inception in 2012, compared with 4.47% for its benchmark. As of June 2020, the fund held $351.1 million in assets spread across 106 investments. Top holdings include:
- National Bank of Kuwait: 11.18%
- Kuwait Finance House: 5.32%
- AHLI United Bank: 5.09%
- Itissalat Al Maghrib (Maroc Telecom): 4.45%
- Safaricom: 4.14%
In terms of geographical exposure, more than half of the fund's assets are allocated to just three countries: Kuwait at 26.93%, Vietnam at 12.67% and Morocco at 11.46%. The ETF tilts heavily toward financial services stocks, which account for 49.74% of assets. Communications stocks held a 14.95% allocation, followed by consumer staples at 8.09% and real estate at 6.23%.
The Invesco Frontier Markets ETF shuttered in February 2020, leaving the iShares MSCI Frontier 100 ETF as the largest and most liquid frontier market ETF available. The fund has an expense ratio of 0.79%.
Global X MSCI Next Emerging & Frontier ETF
The Global X Next Emerging & Frontier ETF (EMFM) aims to match the MSCI Select Emerging and Frontier Markets Access Index. The fund seeks to improve upon emerging market investing by excluding the BRIC, South Korea and Taiwan economies, which it believes are slower growing. In the first quarter of 2020, the fund had allocated 11.74% of assets to Saudi Arabia, 9.87% to Thailand, 8.8% to Indonesia, 8.07% to Malaysia and 6.55% to Mexico.
As of June 2020, the fund held $14.32 million in assets and charged a 0.66% total expense ratio. Top holdings included National Bank of Kuwait, Telekomunikasi, Bank Central Asia, Naspers and Walmart de Mexico. The fund has lost 4.4% annually since its inception in November 2013, compared with a negative return of 3.75% for its benchmark index.