Is the timing finally right for ETFs that invest in the
frontier markets those markets a
tier below the emerging markets? Theres clearly a case to be made for their potential
investment returns. Yet timing here as elsewhere can
be everything: Several frontier markets ETFs that were launched
in late 2008 ran aground on the financial crisis not long
thereafter. Still, two of those have survived The
Guggenheim Frontier Markets ETF (FRN), from Guggenheim
Investments of New York City, and PowerShares MENA Frontier
Countries Portfolio (PMNA), from Invesco PowerShares of
Wheaton, Illinois. And now the 800-pound gorilla has walked
into the room. In mid-September, BlackRock launched its iShares
MSCI Frontier 100 Index Fund (FM). The fund will invest in
equities from 20 widely dispersed and very different frontier
markets, from Nigeria to the United Arab Emirates to Vietnam to
Actually, BlackRock got started with investing in the
frontier markets back in 2008 as well, but in a different way,
notes Daniel Gamba, BlackRock managing director and head of
iShares Americas Institutional Business. Since then, its
been investing in the frontier markets for institutional
clients via private accounts, and that business has grown to
about $530 million in assets under management, he says.
We felt the time was right to bring an ETF, given the
institutional experience we have with the asset class, he
The three ETFs are very different from one another, based as
they are on different indexes and countries. But they do have
one very big common denominator: Theyre all heavily
invested in the financial or banking category.
Guggenheims fund has a 34.75 percent weighting in
financials, while PowerShares has 72.86 percent, and
iShares, 56.39 percent.
Thats because the banking sector usually develops
first in these markets and has publicly traded shares available
for investment, notes Eric Dutram, ETF analyst at Zacks
Investment Research in Chicago. How many stocks are
trading in Nigeria? he says. Even the emerging
markets ETFs tend to be concentrated in banking and oil,
he notes, so its not that much of a surprise that
it would be similar in the frontier markets. The frontier
market ETFs also get a really weird mix of undeveloped
and really rich countries Nigeria, United Arab
Emirates, Qatar its just a weird space
to be in, adds Dutram.
But it can be a profitable space to be in as well, says
William Belden, the head of product management at Guggenheim
Investments. Through June 30 of this year, FRN, with $148
million in assets, was up 7.61 percent, with a three-year
average return of 10.33 percent.
Guggenheim doesnt invest in frontier markets stocks
that are listed on their home countries exchanges.
Rather, it invests strictly in American Depository Receipts
(ADRs) listed on the New York Stock Exchange and Nasdaq, and
Global Depository Receipts (GDRs) listed on the London Stock
Exchange, he notes, since theyre more liquid.
PowerShares PMNA fund, however, hasnt done well
at all. It has just $16.6 million in assets under management,
and its not hard to see why since its own product
literature shows that $10,000 invested at inception would now
be worth less than half, or $4,699. Ouch.
As of June 30, its return so far this year is just 2.67
percent, so its even lagging well behind its
corresponding index, the Nasdaq OMX Middle East North Africa
index, which registered a 6 percent gain during the same period
of time. (The ETF has a stated goal of investing at least 90
percent of its assets in the securities, ADRs and GDRs in that
From an operational standpoint, there are just some
markets that are more difficult to replicate, this being
one of them, says Ed McRedmond, senior vice president of
portfolio strategies at Invesco Powershares. Even though the
ETF hasnt done well so far, there are no plans to close
it, he says. Our mindset at PowerShares in general is to
give it some time if it offers investors a unique
exposure, he says.