Jim Rogers made headlines this week when he suggested that some frontier markets are the next big investment opportunity. In the interview, he was quoted as saying that Myanmar and North Korea looked attractive amid positive developments in those countries.
While the famed commodities investor has made some very prescient calls in the past, the problem is retail investors don’t really have a reasonable way to access these secluded markets.
Besides, if North Korea is the last untapped investment opportunity in the global market, then we’re in bigger trouble than I thought.
Frontier markets are generally known as countries with questionable political and economic stability. They often are in remote geographical regions and are relatively difficult for foreign investors to access. They also might have unique national and corporate laws that make foreign investment a tough pill to swallow.
However, it is those very factors that also give these markets a unique edge in upside potential when compared to developed or even emerging markets that have already taken off.
The two largest frontier market ETFs available to investors today are the iShares MSCI Frontier 100 ETF (FM) and the Guggenheim Frontier Markets ETF (FRN). While these two funds are similar in name, their underlying holdings and country allocations are vastly different, which has led to a noticeable divergence in their total return.
- iShares MSCI Frontier 100 ETF: The three largest country weightings in FM are Kuwait, Qatar and the United Arab Emirates, which combined make up more than 59% of the fund’s total assets. Clearly this fund is skewed toward countries in the Middle East, which obviously would be more suitable for investors trying to access stocks in that region.
- Guggenheim Frontier Markets ETF: By contrast, the top three country weightings in FRN are Chile, Colombia and Argentina, which make up 74% of the 34 securities in this fund.
The heaviest sector weighting in both ETFs is financials.
A quick look at a comparison of the two frontier ETFs during the past 52 weeks shows just how important the security selection and country weightings have been. FM has jumped nearly 19% during the past year, while FRN has lost more than 13%. This is particularly impressive when you take into account that the majority of the countries that make up FM were in close proximity to the threat of conflict with Syria earlier in the year.
Another interesting comparison is that FM has handily beaten its emerging-market counterpart in the iShares MSCI Emerging Market ETF (EEM) over the same time frame. EEM has only gained a paltry 2% over the last year despite its more recent strength.
Although none of the ETFs that I screened had any exposure to the countries that Jim Rogers specified, there is clearly money to be made in frontier markets with the right research and security selection. However, you absolutely should pair any allocation to frontier markets with broader developed or emerging-market indices to diversify your exposure.
In addition, it should be noted that frontier markets likely will experience periods of high volatility in response to shifting socioeconomic variables. So if you do decide to make an allocation to this sector, do so with a risk management mind-set that takes into account a sell discipline. After all, you should always protect your hard-earned nest egg.
David Fabian is Managing Partner and Chief Operations Officer of Fabian Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to download the Fabian brothers’ latest special report, The Strategic Approach to Income Investing.