August 31, 2022

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, its smart to do some research about frontier markets and the type of ETF thats 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.


Its 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 firms 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

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