Look Before You Leap With New Frontier ETFs

by Kyle Woodley | April 3, 2013 8:52 am

This just in: The markets of Nigeria, Central Asia and Mongolia are speculative plays!

All right, all right. Anyone with an Internet connection and a mild interest in global news could tell you these areas are wrought with risk. Refreshingly enough, though, Global X Funds isn’t trying to gloss over this fact as it launches its two new exchange-traded funds focused on these regions.

The Central Asia & Mongolia Index ETF (NYSE:AZIA[1]) and the Nigeria Index ETF (NYSE:NGE[2]) will hit the markets today — a seeming celebration of the recent outperformance of frontier markets compared to their emerging-market counterparts. A look at each:

Still, there’s a significant difference between investing in a basket of a hundred stocks spread across a few continents — as you can via the iShares MSCI Frontier Markets ETF (NYSE:FM[5]) — vs., say, 20 or 30 in one relatively small region.

On one hand, the potential reward is more palpable. Global X CEO Bruno del Ama said the broader hope behind both funds is that the regions involved undergo a “repricing process” where they evolve from very speculative frontier markets into more established emerging markets, and stocks that were heavily discounted for risk watch their valuations explode as these economies grow and the specific businesses expand their profits — much like Colombia, which has been “one of the best-performing markets in the world over the past 15 years.”

“Ten years ago, you were looking at a region that was facing massive problems with internal conflict … drug trafficking … and went through a massive turnaround. [Colombia was] an investment that really was reclassified from a highly speculative-type investment to what is now one of the safest regions in Latin America.”

On the other, obvious hand, explosive growth isn’t a lock … and investors face a laundry list of risks. There’s of course the geopolitical issues scratching at most of these nations. For instance, Nigeria, like several other African countries, suffers from violent unrest and terrorist attacks between Muslim and non-Muslim groups. Some of the nations also face rapidly escalating inflation and internal political turmoil, and in the case of the AZIA fund, these countries have a growing dependence on China for growth — a potentially double-edged sword.

We’re talking about countries that enforce state-run calisthenics[6], for Pete’s sake. There’s nothing “normal” about these regions.

And while Global X has provided a vehicle through which investors can tap these countries, these businesses have scant media coverage (if any), and thus are exceedingly difficult for retail investors to investigate.

Of course, these funds aren’t really designed with retail investors in mind.

Del Ama said NGE and AZIA are the result of a number of inquiries to Global X about Nigeria and Central Asia — but those people are “more on the institutional side … more sophisticated investors that do have an understanding of global markets.”

He stopped short of warding small retailers completely away, but he makes no bones about the speculative nature (and thus increased risk) of these new products.

“One of our recommendations for a mom-and-pop investor … is that any allocation should be very, very small. Think about it as ‘I’m buying the whole of Nigeria as an exposure,’ but you shouldn’t have any more exposure to it than you would an individual stock.”

If you do decide to pile into either of these funds, again, you’re likely not going to find much info on holdings such as Nigerian Breweries PLC or Halyk Savings Bank of Kazakhstan, but you don’t have to just throw your hands in the air and hope for the best. Research analyst Alex Ashby says the best thing you can do is … well, something you should be doing considering any ETF investment:

“We encourage people to look under the hood from an industry perspective,” he said, adding, “Research it on a more macro level. Look at the details of the fund, the methodology, the holdings.”

Kyle Woodley[7] is the Deputy Managing Editor of InvestorPlace.com[8]. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @IPKyleWoodley[9].

  1. AZIA: http://studio-5.financialcontent.com/investplace/quote?Symbol=AZIA
  2. NGE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NGE
  3. SBMRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBMRY
  4. HEINY: http://studio-5.financialcontent.com/investplace/quote?Symbol=HEINY
  5. FM: http://studio-5.financialcontent.com/investplace/quote?Symbol=FM
  6. countries that enforce state-run calisthenics: http://www.eurasianet.org/node/66768
  7. Kyle Woodley: https://www.investorplace.com/author/kyle-woodley/
  8. InvestorPlace.com: https://investorplace.com/
  9. @IPKyleWoodley: https://twitter.com/#%21/ipkylewoodley

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