What To Look For In A Frontier Markets ETF

Investors have hundreds of investment options, and exchange-traded funds (ETFs) provide an easy way to invest in many sectors and regions. A frontier markets ETF is an option that can provide excellent yields, but before you invest, it’s smart to do some research about frontier markets and the type of ETF that’s best for your portfolio.

What Are Frontier Markets?

Stock markets are classified as Developed, Emerging, Frontier or Standalone depending on many factors. In a developed market, you tend to have stable economies, stable governments and stable currencies with high liquidity and easy access to the markets.

 

Developed markets include countries such as the United States, Canada, Japan, the United Kingdom and Hong Kong. Emerging markets include countries such as China, India, Egypt, Mexico, Brazil and South Africa. Frontier markets include countries such as Romania, Iceland, Estonia, Morocco, Nigeria, Kenya, Jordan, Vietnam and Pakistan among others.

 

Why Invest In Frontier Markets?

In general, frontier market investments are considered riskier than investments in emerging markets or developed markets. The economies and governments in these countries tend to be less stable, and these markets often have poor liquidity and unstable currencies.

 

With emerging markets and frontier markets, the governments are established but tend to be a bit less developed and stable with less liquidity and more currency instability. In theory, this makes investing in these markets riskier than investments in developed markets.

 

Despite these risks, there are some opportunities to be had investing in frontier markets. There may be enormous potential for growth and the yields potentially could be higher than many investments in developed or emerging markets, although there is never any guarantee of success with this or any other investment.

 

While the risk may be greater, the rewards could be higher as industries in these regions and countries are expanding rapidly to provide goods and services for growing populations. Populations in emerging and frontier markets tend to be younger and less focused on annuities, which means that they have greater demands for goods and services in general which helps fuel the market and can provide great opportunities for an investor.

 

Of course, as with any investment, there are never any guarantees that an ETF or any type of investment will yield positive results. This is why thorough research is an important step to take before allocating money to any type of investment.

 

Why Consider A Frontier Markets ETF?

With limited access to frontier markets, purchasing shares in an ETF can be the easiest way to gain exposure to frontier markets as well as emerging markets. Additionally, ETFs are diversified, which can minimize risk as the fund contains holdings from many companies.

 

There are a few general frontier markets ETFs out there that you can select, or you could select an ETF that invests in companies in specific countries classified as frontier markets. For instance, you could opt for a Vietnam ETF or perhaps a regional ETF such as an Africa ETF, where the holdings are based in countries throughout the African continent.

 

Another investment strategy that can help you gain geographic exposure in a specific frontier market might include looking into purchasing real estate in that country. Other asset classes might include buying stock in a specific company (as opposed to a fund with many holdings) or investing in commodities or currency. In general, these can be more difficult than purchasing an ETF, but it can be smart to weigh all of your options when investing to ensure long-term success.

 

Selecting The Best Frontier Markets ETF For You

With any ETF, there are a few basics that investors should think about to determine whether or not this is the best choice for their portfolio. Before buying shares, an investor should track the performance data of the ETF in general, especially how it relates to whatever index it is tracking.

 

ETFs are built to track a specific index as closely as possible. For instance, an Africa ETF might track the MVIS® GDP Africa Index. In theory, the ETF should track along with the index. So, if the index is up by 6%, in theory, your ETF also should be up by about that much. 

 

Typically, the increase will be less than the index increases because the issuer does incur a cost to manage the fund, and some of the returns pay for those expenses. If there is a large discrepancy between the index the ETF tracks, this can be a red flag.

 

It’s also wise to look at the holdings in the ETF and make note of how the holdings are weighted. Research the companies whose shares comprise the highest percentage of net assets as these tend to make the most impact on the performance of the fund. Keep in mind, that these holdings and the percentage of net assets can change over time as the fund managers may decide to alter the fund.

 

Be sure to look at the country weightings and sector weightings. For instance, you might want to ensure that the country weightings are truly in frontier markets rather than a larger developed country. Many people opt for frontier market investing not only as a potential source of income but also as a type of socially responsible investing (SRI) strategy.

 

If the frontier ETF is mostly weighted toward companies owned by foreign investors, this might go against your SRI goals. Likewise, with sector weightings, you might wish to invest in specific industries and exclude others, so take a look at the sectors represented in the ETF.

 

In general, ETFs can provide an easy option for investors provided they research each fund carefully and keep an eye on the progress (or lack of progress) of the ETF. A trusted financial advisor can be a good resource to help you select the best ETFs for you whether they are focused on developed markets, frontier markets or emerging markets, such as a South Africa ETF.

 

We also recommend that you research the company offering the ETF and check out the history of the company and the market value of that firm’s assets under management. Additionally, make note of the historical management performance and you can even do some research about the fund managers.  

 

Keep Up With Frontier Markets

At Money Watch Africa, our goal is to provide helpful information and emerging market news for the Africa investor, including emerging market ETFs and frontier markets ETFs. Be sure to check our website regularly to keep up on the latest developments on how to invest in Africa. 

Emerging Market News & Investment Options

Emerging markets can provide investors with some excellent investment options and staying on top of emerging market news is the best way to find opportunities that might suit your portfolio.

What Are Emerging Markets?

Countries or regions tend to be categorized as Developed, Emerging or Frontier markets. There are various companies and stock exchanges that make a determination about which countries should be placed in which category.

 

Developed markets include the United States, Japan, the United Kingdom, Canada, Australia, Hong Kong, South Korea and many more. Emerging markets include countries such as Mexico, Brazil, Egypt, South Africa, India and others. Frontier markets include countries such as Kenya, Nigeria, Romania, Pakistan, Iceland and Vietnam.

 

How Are Countries Classified?

For instance, MSCI Inc., a New York-based finance company has created its own market classification system. Other well-known index classification systems include the S&P Dow Jones Indices and the Financial Times Stock Exchange (FTSE). Generally, the classification lists they produce are similar, but they don’t always agree 100% on a country’s classification. 

 

Let’s take South Korea as an example. S&P lists South Korea as a developed market, while MSCI lists this country as an emerging market and FTSE lists South Korea as an “Advanced Emerging” Market.

 

Countries are classified based upon several factors. For instance, access to the market itself is a factor. In the United States or Japan, it is generally very easy for investors across the globe to access our stock markets while it can be more difficult to access the markets in emerging markets such as Poland, Turkey or Peru.

 

The countries also are judged on their overall economic development and the stability of their economy, currency and government. Russia is a good example. Since the fall of communism, Russia began to transform from a completely closed society to an emerging market where investors had much greater access to the market.

 

The recent invasion of Ukraine, however, has added a great deal of instability, and this country has been recategorized by many of the organizations that rank these nations. MSCI moved Russia from emerging market status to standalone status while Russia no longer appears on the S&P Dow Jones or FTSE market classification systems.

 

Iceland is an example of how access to the market economy affects a country’s standing. This European nation has a stable government and a high standard of living, but it is still categorized as a frontier market because it’s just not all that easy to access investment opportunities in Iceland.

 

In general, with both emerging markets and frontier markets, these are countries that are poised for fast growth. For investors, investments in emerging markets potentially can provide high-yield results although they might also come with a higher risk than some investments in developed markets.

 

Of course, even in developed markets, there can be volatility. For instance, every time the Federal Reserve decides to institute a rate hike, this can affect the market, as interest rate changes have a direct effect on the economy. During the recession, as real estate crashed, this also affected our economy.

 

However, unlike an emerging market or frontier market, our long-standing economy and stable government make it easier for our developed nation to endure market fluctuations and even issues such as the COVID-19 pandemic.

 

More Risk? Higher Returns?

In theory, emerging market investments carry a higher-level risk, but also the potential to yield higher returns on investment. Emerging and frontier markets tend to be growing at a fast pace and with a younger population base, the need for goods and services continues to expand.

 

Whether you invest in an emerging market, frontier market or developed market, there is never any guarantee that your investment will prove beneficial to your portfolio. Even Fortune 500 firms go bust. Take General Motors as an example. Founded in 1908, it was one of the biggest car manufacturers on the planet and one of its presidents famously stated, “what’s good for GM is good for America.” 

 

Fast forward to the recession of 2008 and you find a company riddled with mismanagement that failed to keep up with the times. Eventually, the company was bailed out by the U.S. government and reorganized into a new company. This is just one example of a so-called solid investment that failed, and there are plenty of other examples, including Blockbuster, Kodak and more.

 

The Power of Diversification

In general, the best option for investors is to build a diversified portfolio that includes some stable, long-standing companies that produce steady growth to build for the future as well as selecting some investment options that potentially can provide you with some higher short-term earnings.

 

It’s often wise to consider investing in mutual funds or exchange-traded funds (ETFs) as these are diversified to include a variety of holdings, rather than simply investing in a single company. Real Estate Investment Trusts (REITs) are another option to consider. These are companies that either own or finance real estate that produces income. They might own apartment complexes or finance homebuilders, etc.

 

All investments carry a certain amount of risk, and the best advice we can give is to diversify your portfolio and keep a close watch on the market and your investments. While a trusted financial planner can be a great asset, you still need to do some research and read up on market trends and potential issues related to your investments.

 

Before purchasing shares in a mutual fund or ETF, research the holdings in the fund. Study how the fund is weighted and pay particular attention to the top ten holdings, as they tend to affect the overall performance of the fund the most.

 

Options For The Africa Investor

At Money Watch Africa, our focus is mainly on helping investors find investment opportunities in Africa. Several nations in Africa are classified as emerging markets or frontier markets.  

 

MSCI classifies Egypt and South Africa as emerging markets in Africa, while FTSE classifies South Africa as “advanced emerging,” and Egypt as “secondary emerging.” Several other nations are listed as frontier markets by FTSE, including Cote d’Ivoire, Ghana, Kenya, Morocco, Nigeria, and Tanzania.

 

MSCI lists Kenya, Mauritius, Morocco, Nigeria, Tunisia and the West African Economic and Monetary Union (WAEMU) as frontier markets. WAEMU includes Benin, Burkina Faso, Cote d’Ivoire and Senegal. MSCI also lists Botswana and Zimbabwe on its standalone index, two countries that are poised to gain frontier status as their markets improve and expand.

 

If you wish to invest in Africa, opting for an Africa ETF, such as a South Africa ETF can be one of your easiest options. There are also emerging market funds and frontier market funds, and some of which may be focused on Africa-based companies. Again, just research the companies in the fund and the fund managers to discover if this is the right fit for you.

 

Discover The Latest Emerging Market News

The websites for MSCI, FTSE and S&P Dow Jones can be excellent resources for emerging market investors. At Money Watch Africa, we also update our website with emerging market news, particularly as it relates to Africa investing, so be sure to check back from time to time to find possible investment options for your portfolio.