Invest in the Final Frontier (Markets)

You can opt-out at any time.

Please refer to our privacy policy for contact information.

Frontier markets is an economic term coined in the 1990s to represent smaller emerging markets experiencing or poised for strong growth. These markets are less established than the BRICs. but still show signs of stability and openness to investors. It’s best to think of frontier markets as up-and-coming emerging markets for early-stage investors.

The term itself was first coined by the International Finance Corporation (IFC), which is the private sector division of the World Bank Group. But it wasn’t until early the early 2000s that the term caught on and began to be used by larger companies like Standard & Poor’s (S&P).

The Frontier Markets from A to Z

The term frontier market may be ubiquitous, but its criteria are not very well defined. As a result, there are many different lists of frontier markets put together by various organizations. The most common lists used by investors are those assembled by the FTSE. MSCI. and S&P, which vary in number from 25 countries to more than 30 countries.

Common countries between these lists in 2010 included: Argentina, Bahrain, Bangladesh, Bulgaria, Croatia, Estonia, Jordan, Kenya, Lithuania, Mauritius, Nigeria, Oman, Qatar, Romania, Slovenia, Sri Lanka, Tunisia, and Vietnam. However, it’s important to note that these lists are subject to regular change as the economic and political climates change.

The lists of countries currently on these lists can be found here:

Benefits & Risks of Investing in Frontier Markets

Frontier markets are inherently riskier than developed, developing and emerging markets. Often times, these markets may be economically unstable or politically closed relative to their larger counterparts. But these increased risks can result in higher potential returns. As a result, frontier market investments are usually best for investors with a long time horizon.

The major benefits of investing in frontier markets include:

• Higher Growth Potential. As with companies, smaller economies have greater growth prospects simply because of their size. It’s easier to double a $1 billion gross domestic product (GDP) to $2 billion than a $1 trillion GDP to $2 trillion.

• Positive Demographic Trends. Many frontier markets have young and growing populations, which can help sustain long-term growth, in contrast to aging populations that require social support programs and don’t contribute to growth as much.

The major risks of investing in frontier markets include:

• Geopolitical Risk. Many frontier markets operate in politically unstable regions of the world, including the Middle East and Africa. Consequently, these investments may face geopolitical risks ranging from regime changes to outright wars.
• Openness & Liquidity Risks. Many frontier markets have relatively few companies and investment opportunities, while securities markets may not be fully developed. Combined, this could mean less liquidity and protection for investors.

Investors can overcome the risks of investing in frontier markets by properly diversifying their portfolio and monitoring geopolitical events. It’s also important to incorporate frontier markets properly into your portfolio. For instance, younger investors can afford to take on more exposure to these riskier markets, but older investors may want to limit their holdings.

Investing in Frontier Markets with ADRs & ETFs

Exchange-traded funds (ETFs) represent the easiest way for investors to gain exposure to frontier markets. By virtue of their design, ETFs can provide investors with both diversification and broad exposure to a variety of frontier markets. But alternatively, investors can also purchase American Depository Receipts (ADRs) for popular companies in frontier markets.

The five most popular frontier market ETFs include:

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

There are also a number of ADRs that may be available to investors. To find these securities, investors should identify the largest companies operating within their target frontier market country and then search for the corresponding ADR. Note that not all companies have ADRs and typically only large companies have ADRs that are liquid, which makes them a riskier bet.