A Guide to Frontier Market ETFs

Exchange Traded Funds (ETFs) have become a favoured way to easily invest in a broad range of equities, bonds, currencies or commodities and there are now thousands of different products on offer. ETFs are funds which trade like stocks on an exchange, but each ETF holds a particular portfolio of shares, bonds, or even physical assets and depending on the overall performance of the underlying investments either rise or fall in value and pay dividends (or not) like a share does. Of course if you have decided the ETF has peaked in value or you feel another will offer better returns, or need to cut your losses you can sell just like a share.

The major advantage of an ETF is that instead of having to actively managing a portfolio of stocks, the ETF does that for you, ensuring a diversity of holdings and spreading your risk and saving you the hassle of having to research and buy dozens of different stocks. While you are unlikely to seriously outperform the market, you stand a decent chance of broadly tracking market performance. ETF’s hold wide a range of different investments but are usually focused one sector, country or some speciality, so you can have ETF’s with an Indian or African focus, one focused on agricultural commodities, energy stocks or even some unusual ones like an Exponential Technologies ETF which holds stocks from futuristic ventures involved in areas such as big data, nanotech, neuroscience, robotics, 3-d printing, bioinformatics and financial service innovation

The other saving is cost of transactions, by investing in one product, you will not be forced to pay high fees by having to buy large chunks of shares, ETFs typically have a low expense ratio (around 0.25 – 0.75%).

The Advantages of Frontier Market ETFs

For those interested in gaining exposure to fast growing Frontier markets, ETF’s offer a fantastic way forward, as buying shares in most of these exchanges can be particularly difficult because of restrictions on foreigners buying shares or the fact that you need to set up local bank accounts, produce paperwork for local brokers and pay sometimes high fees for each transaction. Also ETFs are typically traded on developed market’s exchanges meaning there is less direct currency risk involved.

A frontier market ETF would typically invest in stocks, usually weighted towards particular sectors – financials, FMCG and industrials are often popular but other areas will be covered as well. There are multiple country ETFs, which the spread risk across several countries, or you can put your money into a single country such as the VanEck Vietnamese focused fund.

Vietnam

Vietnam is a well-regarded Frontier market, often regarded as mini China because of their many similarities (read my guide here) and the holdings in the ETF are made up of major Vietnamese companies, to recreate this diverse portfolio you would have to buy 20 or more Vietnamese shares, which would incur considerable brokerage fees not to mention time. However the fund has not had a great performance, despite the Vietnamese stock market rising quickly over the last five years.

Pakistan – King of the Frontier

Another single market ETF was a Pakistan focused fund, which was considered highly exotic on launch and has seen a spectacular 21% rise in value in just a year, driven by the booming Karachi stock market and Pakistani economy.

Stock markets are often driven by political sentiment, foreign exchange rates and government policy as much as value, something which is particularly true of Frontier economies so economic performance does not always translate into stock market gains.

Multi-country ETFs

You can buy Frontier market ETF which cover a wide variety of countries and sectors, here are three examples:

MSCI Frontier 100 despite the name this contains 97 shares from Frontier markets in a wide range of different industries, it has performed well in the last year with a 15.46% return but not so great in the past 3 years where a -5.46% has been experienced. The fund has a heavy emphasis on financial stocks with 43% of shares in this category.

For those looking for a mix of Emerging and Frontier market shares (where is much overlap in any case) the Global X Next Emerging & Frontier ETF has 217 companies from a wide range of industries and spread across every continent but with firms from Thailand and Malaysia as the two biggest contributor of shares. The 1 year return is a healthy 10.54%, while the 3 year return is a not so brilliant -14.67%.

The Guggenheim Frontier Market ETF has 82 companies from the frontier with Kuwait and Argentina the two largest sources of equities. The difference between the fund’s 1 year and 5 year performance demonstrates how volatile funds can be, the 1 year gain from 13 March 2016 to present a 21.09%, but go back 5 years and the performance is a -29.85% fall.



Categories: Frontier Markets

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