Frontier Markets Compared To Emerging Markets
There is no definition of the exact difference between what is called a frontier market vs. an emerging market. Some investors, for example, consider Israel and Korea, among others, to be developed markets, while others do not.
In general, frontier markets are smaller and have fewer companies, fewer investors, less trading, and currently less indexes and ETF that track them. There's also less regulation, information on the companies and transparency. The markets are considered to be in the nascent stages of development and even riskier than emerging markets, which, of course, are riskier than developed markets like the United States.
The S&P/ Global Frontier Stock Markets index, which covers the stock markets of over 20 countries, has gained an amazing 49 percent in the year period that ended on Aug. 31, 2007. That return compares with only a 16 percent for the main Standard & Poor 500 stock index during this same one year same period.
But numerous potential downfalls exist in frontier markets. While the biggest risk is missing out on the growth opportunity, some other risks include the following : One big concern is the lack of overall "liquidity," (as reflected by the limited number of exchange traded funds), or the ability to buy and sell stocks quickly. Investment house WestLB Mellon said it recently took him close to a month to get out of a single position in a frontier market in Europe, however that is an individual stock. Frontier market ETFs are very liquid and trade like any other ETF on the NYSE.
But the bigger risk is missing out on the opportunity. Frontier stock markets, and the recently released frontier markets ETFs that track them, are like the emerging markets of 10 years ago. And how many times do you kick yourself for not being in the emerging markets right from the start?