Frontier and Emerging Market ETFs

Stock traders looking at market data on emerging markets
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Frontier and emerging markets - spanning from Africa to Latin America and beyond - represent some of the fastest growing economies in the world. For investors looking to participate in this growth, exchange-traded funds ("ETFs") have become a popular way to gain diversified exposure in terms of both geography and industry to these important countries.​

In this article, we will look at frontier and emerging markets, what makes them so compelling for investors, and some ways to easily gain exposure to the asset classes.

What Are Frontier and Emerging Markets?

Emerging markets is a term that was coined in the 1980s to represent countries transitioning from developing to developed status. While the term is commonly used by investors, there is no universally accepted definition of emerging markets. Instead, investors can find emerging markets in everything from acronyms like BRICs to indices compiled by companies like S&P or FTSE.

When emerging market economies began to mature, the term frontier markets was coined to represent investable countries with lower market capitalizations and liquidity. These countries are widely considered to be the up-and-coming emerging markets but are a bit more hazardous to investors in terms of political risk, market maturity, and transparency.

Frontier Market ETFs: Invest in the Final Frontier

Frontier markets are riskier investments that generally offer high potential returns in return for taking on the added risk. While frontier markets aren't exactly defined, there are several popular indices that provide lists of countries. For instance, the FTSE Country Classification Lists and the MSCI Frontier Market Indices are both popular options for investors looking for opportunities.

In general, frontier markets are ideal for younger investors that plan to keep money in play over a long time horizon. The long-term potential of frontier markets is higher due to their smaller size (it's easier to double $100 than $1 million) and demographic trends (younger workforces). But there're also a lot of near-term risks ranging from geopolitical instability to liquidity risk.

Some popular frontier market ETFs include:

  • Guggenheim Frontier Markets ETF (NYSE: FRN)
  • Market Vectors Gulf States ETF (NYSE: MES)
  • WisdomTree Middle East Dividend Fund (NYSE: GULF)
  • SPDR S&P Emerging Middle East & Africa ETF (NYSE: GAF)

Emerging Market ETFs: Diversify the Safe Way

Emerging markets represent a somewhat safer investment than frontier markets and offer similar returns. Like frontier markets, emerging markets aren't exactly defined by a specific index, but there are several popular indices used by investors. These indices include the FTSE Emerging Markets and the MSCI Emerging Markets indices.

Emerging markets are relatively stable when compared to frontier markets. But they do carry more risk than developed countries like the United States. Consequently, investors with a medium to the long-term outlook are generally best off including these types of investments in their portfolios. Older investors may want to stick to all-world or more diverse funds focused on developed countries.

Some popular emerging market ETFs include:

  • iShares MSCI Emerging Market Index ETF (NYSE: EEM)
  • Vanguard MSCI Emerging Markets ETF (NYSE: VWO)
  • BLDRS Emerging Markets 50 ADR Index ETF (NASDAQ: ADRE)
  • SPDR S&P Emerging Markets ETF (NYSE: GMM)

Alternatives to Frontier & Emerging Market ETFs

Frontier market and emerging market ETFs are generally the best bet for obtaining exposure to these markets due to their diversity and liquidity compared to individual stocks. But there are several other options available to investors depending on their objectives.

Investors looking for more specific opportunities can also consider purchasing American Depository Receipts ("ADRs"). These are securities listed on U.S. stock exchanges, like the NASDAQ or NYSE, that track a foreign stock trading on a foreign exchange. This allows investors to target specific companies in specific markets, but they are significantly less liquid than ETFs on average.

Investors looking for more diversification - such as older investors with a shorter time horizon - can also consider all-world ETFs that have some modest frontier and emerging market exposure built in. Some popular all-world ETFs include iShares MSCI ACWI ex-US Index Fund (NASDAQ: ACWX) and the Vanguard Total World Stock Index Fund (NYSE: VT).

Key Points to Remember

  • Frontier and emerging markets offer investors higher potential returns, but they also involve greater risk than developed countries like the United States. These attributes make them ideal for investors with a medium to long-term time horizon.
  • There is no single definition of a frontier market or emerging market, but instead, there are several different indices. Many of these indices have ETFs that offer investors a quick way to diversify in these high growth markets.
  • Investors looking for either more specific exposure or broader exposure have several alternatives to ETFs, ranging from ADRs to all-world funds.