Investing in Frontier Markets with ETFs

Executive Summary

  • Frontier Markets offer undiscovered opportunity and diversification potential.
  • Ways to gain exposure with ETFs:

Total Frontier Markets: FRN

Middle East and North Africa: GAFPMNAAFK

Dividend: GULF

Country: EZA

Investment case

Frontier Markets present an opportunity for investors willing to move beyond conventional universes.

Low Valuation and Correlation to Developed Markets

Located in Asia, Europe, the Middle East, Africa, and Latin America, these markets are generally not included in the popular developed and emerging market indexes. Typically, access can be difficult and liquidity can be low. However, their valuations are also low, as are their correlations, both among themselves and with other more developed markets.

Improving Economies

While many investors still perceive frontier markets as being in decline, ravaged by wars, disease, famine, and authoritarian governments, this view often reflects media reporting rather than reality. Many frontier countries have undergone a radical restructuring of their economies since the early 1990’s, and their macroeconomic fundamentals are often sound and encouraging.

Frequently, real per capita GDP is rising, inflation is low, currency exchange rates are becoming more stable, and corporate profits and return on investment are relatively high. Thus, from an economic standpoint frontier market countries are indeed emerging rather than stagnating.

Final Frontier for Investment

They are not formally recognized as emerging today, but with further progress it will not be possible to ignore them much longer. Looking ahead, these markets may represent the final frontier for global capital. As the emerging markets of today move on to become part of the developed world, the stage is set to bring along a new set of emerging candidates in the frontier markets.

Uncovered Opportunity

While available information is often sparse, local regulations are complex, and research coverage by analysts and brokerage firms is limited, these were exactly the characteristics of emerging markets 20 years ago. These challenges create an opportunity for investors to uncover neglected companies with healthy, improving operations and stocks that have been ignored by the mainstream investment community.


Many of these markets will likely follow the same path that emerging markets have taken during the past 20 years, and that patient investors in Frontier Markets will be rewarded.

Source: The Journal of Investing, Fall 2007


Frontier Markets ETFs are a recent innovation and only a few have been launched.

At $179 million, the largest Frontier Markets ETF is the SPDR S&P Emerging Middle East & Africa ETF (GAF) which tracks an index of
publicly traded companies domiciled in emerging markets within the Middle East and Africa.  Most holdings are concentrated in South Africa (53%) and Israel (22%).

The PowerShares MENA Frontier Countries Portfolio (PMNA) which tracks an index of the largest and most liquid securities of companies domiciled in Middle Eastern and North African countries that have smaller economies or less developed capital markets than traditional emerging markets. The Index currently includes securities domiciled in: Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates.

The Claymore BNY Mellon Frontier Markets ETF (FRN) tracks an index of ADRs and GDRs of companies in the Frontier Market.
As of June 23, 2008, the countries represented in the Index include: Bahrain, Chile, Columbia, Czech Republic, Egypt, Estonia, Georgia, Kazakhstan, Kuwait, Lebanon, Nigeria, Oman, Pakistan, Peru, Poland, Ukraine and United Arab Emirates.

The Market Vectors Africa Index ETF (AFK) tracks an index of African companies that span 11 countries — from the more developed South Africa, Egypt and Morocco to the frontier markets of Nigeria, Ghana and Zambia. The Index also includes offshore companies that generate the majority of their revenues in Africa.

The WisdomTree Middle East Dividend Fund (GULF) tracks the performance of companies in the Middle East region that pay regular cash dividends. Companies must be eligible to be purchased by foreign investors and incorporated in and listed on a major stock exchange in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar or the United Arab Emirates.

Some country ETFs in the Frontier Markets are also available.  For example, the MSCI South Africa Index Fund (EZA) tracks the
South African equity market aiming to capture 85% of the (publicly available) total market capitalization.

Top Performers


1. MSCI South Africa Index Fund (EZA) – $646 million

2. SPDR S&P Emerging Middle East & Africa ETF (GAF) – $179 miillion

Lowest Cost

1. SPDR S&P Emerging Middle East & Africa ETF (GAF) – 0.60%

2. Claymore BNY Mellon Frontier Markets ETF (FRN) – 0.65%

See the directory.