Frontier markets: The next big thing?

By Walter Frank, editor The MoneyLetter

Investors always seem to be looking for the next best thing, and much attention has recently turned toward emerging markets.

In a recent BusinessWeek interview, Mark Mobius, emerging markets portfolio manager at Franklin Templeton funds, noted that one reason investors have flocked to equities -- and emerging markets in particular -- is a lack of yield on dollar deposits in the US.

Mobius also cited fundamentals, saying, 'If you look at any time period .. emerging markets have outperformed US and global markets. Their economies are growing faster.'

He adds that during the Asian crisis of 1997-1998, emerging market policymakers 'realized they needed strong balance sheet at the national and the company level, and had to build up foreign reserves, which they've done.'

He also noted that despite recent gains, these markets are only 'half-way toward the previous high of 1997.'

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Below we introduce three emerging/frontier markets ETFs. Keep in mind that these funds do carry more risk owing to potential liquidity, political, economic, social and other risks.

Claymore/BNY Mellon Frontier Markets (NYSE: FRN)

In June 2008, Claymore Securities launched this fund to provide investors with access to up to 41 countries that are less developed than emerging markets.

Frontier markets are often though of as tomorrow's emerging markets. They offer the potential for greater investment gains due to greater inefficiencies in information and valuation.

This fund's index contains all companies in the 41 countries with float-adjusted market caps of more than $100 million that have depository shares that trade on US or London exchanges.

The fund is well diversified by country; about 45% of assets are in large cap stocks, with another 45% in mi-caps. The fund holds 39 stocks and gained 50.3% in 2009.

Market Vectors Africa (NYSE: AFK)

In July 2008, Van Eck Global launched this first ETF to be focused exclusively on Africa. Its base index spans 11 countries -- from the more developed South Africa, Egypt and Morocco, to the frontier regions of Nigeria, Ghana and Zambia.

The index includes 50 publicly traded companies domiciled in Africa as well as "offshore" companies that generate at least 50% of their revenues in Africa. The latter account for 21% of assets.

Firms must have a market cap of more than $200 million, and meet liquidity and trading requirements. The region supports vast natural resources and benefits from rising commodity prices, debt reduction, and inflow of investment capital and better economic management. The fund rose 35% in 2009.

SPDR S&P Emerging Middle East & Africa (NYSE: GAF)

As with other SPDR funds managed by State Street Global Advisors, this one tracks a specialized S&P index; it is a market cap weighted index based on investable publicly trades cap companies domiciled in emerging Middle Eastern and African markets.

The focus on market capitalization means nearly half the portfolio is invested in large caps, and 42% in mid caps. That also results in a portfolio where the Middle East is strongly represented by Israel, and Africa by South Africa.

There are just over 100 stocks in the portfolio; top holding Teva Pharmaceuticals accounts for 11% of assets. The fund advanced 47.4% last year.

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