Investing in the Final Frontier
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
No, fellow classic TV fans. I am not talking about ‘space,’ as referenced in the title sequence of every episode of Star Trek. My final frontier is something strictly terra ferma-based. What I am referring to is an economic term used to describe areas of the world known as “frontier markets.”
Emerging markets became increasingly popular over the years as investors looked to diversify their portfolios into less-developed, but fast-growing regions of the world. And over the long-term, those emerging market investments have given many investors some very handsome profits. Although investors have embraced these emerging areas of the world, such as the BRIC countries (Brazil, Russia, India and China), as part of a globally diversified portfolio, investors have been less willing to embrace the frontier markets as part of their investing strategy.
There are some good reasons for investor unwillingness to include frontier markets as part of their portfolio. These frontier markets are particularly difficult for your average investor. Being generally less developed than traditional emerging market countries, frontier markets often have very low levels of liquidity, little regulation, poor financial reporting and political uncertainty (all similar descriptors assigned to current emerging market countries decades ago). There is also another reason why most investors have not embraced the frontier markets. It is that those investors have no idea how to actually invest in frontier market countries.
Investing in a single company in the frontier markets can be a daunting task. That is why most investors would benefit from the ease provided by frontier market exchange traded funds (ETFs). In the world of frontier market ETFs, there are three primary options for investors to choose from. The first is the Guggenheim Frontier Market ETF (NYSEMKT: FRN) offered by Guggenheim Investments. The second is the PowerShares MENA Frontier Countries Portfolio (NASDAQ: PMNA) offered by Invesco (NYSE: IVZ). The final option is also the newest frontier market ETF (created on September 12), the iShares MSCI Frontier 100 Index Fund (NYSEMKT: FM) offered by BlackRock (NYSE: BLK).
In talking about frontier market ETFs, it is important to note that there is not a singular definition as to what constitutes a frontier market country or a frontier market exchange traded fund. Therefore, the ETFs that look to invest in the frontier markets can employ drastically different methodologies. The Guggenheim Frontier Market ETFs idea of a frontier market ETF is invest primarily in South America (with similar investments to most Latin America emerging market funds). With 42.62% of Guggenheim’s ETF being weighted towards the single country of Chile (probably the most lawful, politically stable and economically strong countries in all of Latin America), it hardly fits my personal definition of a “frontier market” ETF. For true exposure to the frontier markets, let’s look at the other two ETF options.
Both the PowerShares MENA Frontier Countries Portfolio and the iShares MSCI Frontier 100 Index Fund fit my personal definition of a frontier market ETF. Both of these exchange traded funds are heavily weighted toward the Middle East, with a little bit of a North Africa kicker. For PowerShares’ PMNA ETF, Kuwait, Qatar, the United Arab Emirates and Egypt collectively make up 79.61% of the ETF. iShares’ FM ETF has a slightly different country mixing, with Kuwait, Qatar, Nigeria and the United Arab Emirates making up 69.31% of the fund.
So which is the correct exchange traded fund to invest in? Well, certainly not Guggenheim’s ETF (not if you want true frontier market exposure). That leaves PowerShares’ PMNA and iShares’ FM as your two remaining options. For my own portfolio, I own the most recently created fund, the iShares Frontier 100 Index Fund, which is the more diverse of the two ETFs (both in terms of the number of holdings and the country weightings). Choosing between the two is essentially a matter of personal preference though. Both PowerShares and iShares offer you the ability to easily invest in the frontier markets of the Middle East and North Africa. They each just have slighting different ways of going about doing so. If you want to give your portfolio exposure to the final frontier of investing, it is hard to go wrong with either of those two ETF options.
WhichStocksWork owns shares of iShares MSCI Frontier 100 Index Fund. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!