In one of the most innovative product launches that has occurred in recent memory, exchange traded fund houses are gearing up to roll out ETFs and mutual funds that invest in frontier stock markets.
Franklin Templeton was arguably the first major fund company to spot the opportunity and has recently filed for a MENA fund (Middle East North Africa Fund), which will invest in many of the frontier markets. Morgan Stanley Mutual Fund is also preparing plans for a frontier market fund to invest in frontier markets. More on Franklin Templeton Frontier Market Fund.
Frontier markets include frontier countries such as Qatar, United Arab Emirates, Egypt, Bahrain, Jordan and Morocco among others. They are usually described as the smallest, less liquid, less developed countries that make up a portion of emerging market countries.
Merrill Lynch said that frontier stock markets appear to be less volatile than most other equity markets. They have strong economic growth and external balances, particularly in the Gulf and Asia.
The S&P/ IFC Frontier Index, which is an index that measures the performance of 37 frontier countries has returned an average of over 37 percent per year during the last five years, while MSCI Emerging Markets Index has returned 25 per cent per year. These frontier markets have obviously outperformed other stock markets over a period of time.
When emerging economies and even less developed markets have been hurt by issues such as peaking inflation, oil prices and rising interest rates, frontier stock markets have not been hurt as much and some of them are even producers of oil.
Morgan Stanley said that their frontier market fund — the Morgan Stanley Frontier Emerging Markets Fund — has had positive returns of 0.11 per cent year to date. So it makes sense to go for frontier market ETFs and funds because these countries are in different, and earlier, stages of their economic cycle, which creates a lot of potential for investors.