Frontier Markets ETF

Written By Brian Hicks

Posted September 28, 2009

A whole new set of maps is being drawn for investors heading into 2010.

We were shown in 2008 that there are plenty of pitfalls on investment paths that have been beaten for generations. Investors saw just how dangerous it is to trust the old yellowed maps to fortune, as bulwarks like Lehman Brothers crumbled.

Right now, you already have more opportunities than ever to break away from the herd and reap higher returns by investing in select Frontier Markets.

The most prominent is the Claymore/BNY Mellon Frontier Markets ETF (NYSE:FRN).

What is a Frontier Market?

A few key features traditionally define frontier markets:

  • difficulty of access for outside investors

  • high presence of risk factors (political and economic)

  • the potential for both whopping returns and crushing declines

Simply put, frontier markets are the last outposts of investibility. People in frontier markets remember hunger well, but unlike similar folks in emerging markets — the next step up toward developed economy status — their countries aren’t making headlines with huge GDP increases or export volumes.

As a result, you’ve heard much more about China‘s growing momentum than, say, Poland, which I told you on September 21 is expected to be the sole European nation with GDP growth in 2009.

You can chalk that attention gap up to the 1.3 billion-strong Chinese consumer base and foreign markets’ love affair with the Middle Kingdom’s low-cost manufacturing.

But access to Shanghai A-shares through the Morgan Stanley China A-shares fund (NYSE:CAF) didn’t develop overnight. Intrepid investment experts made their first forays into China in the 70s and 80s, looking for bright spots of comparative advantage and investor access.

Today, China is highly investible, meaning you can buy and sell shares of many China-based American depositary receipts (ADRs) and exchange-traded funds (ETFs) as easily as you can tap the success of U.S.-based public companies.

Poland, even as the lone economy in Europe to keep its head above water this year, can’t even crack the SPDR S&P Emerging Europe ETF (NYSE:GUR).

There is another way to play Poland, though, and you’ll find the Eastern European country there with its frontier market peers like Lebanon, Nigeria, Egypt and Colombia in the Frontier Markets ETF (NYSE:FRN).

Foreign direct investment (FDI) has been high for a number of years, with multinational corporations and financial institutions pouring money into everything from oil & gas exploration to telecommunications and tourism.

Only now are U.S.-based traders able to tap the churn of investment dollars brought by higher domestic consumption in frontier markets. Central European Distribution Company (NASDAQ:CEDC), a seller of premium alcohol in Eastern Europe, is just one example of the equity opportunities already delivering handsome gains. Colombia’s Bancolombia (NYSE:CIB) and Ecopetrol (NYSE:EC) are also adding to the list.

Slowly but surely, these countries are opening up to us.

Frontier Market ETF Key Points

NYSE:FRN is comprised of mostly mid-cap companies (63%); the top country represented in the fund is Chile (33%), which ranked an impressive #11 in the recently-released 2009 World Index of Economic Freedom. Poland comes in second in ETF allocation (15%), followed by Egypt, Colombia, and Kazakhstan.

That’s right: Kazakhstan! This fund takes you far from home, straight to where the money is fresh and flowing fast.

In its movement, the fund has borne out the high-risk/high-reward thesis of frontier market investors. . .

From deeper troughs during the downturn, the market rally since April has given FRN investors 60% gains versus just under 30% for the S&P 500.

Volume on FRN is light, which is typical of stocks and funds that are just too far off the paved roads Wall Street tells investors to stay on. Remember, though, that when we discover that the bridge is out and the heavy hitters neglected to let us know, going off the beaten path doesn’t seem like a bad idea.

NYSE:FRN is currently trading at just around $18 per share, up from $11 on March 30.


Sam Hopkins

Sam Hopkins

International Editor

P.S. Along with frontier markets, more and more investors are benefiting from international renewable energy shares. In Green Chip International, we guided readers to 40% gains in an Indian renewable energy stock that today piled on another 25%! On the heels of the G20 Summit and ahead of this winter’s COP-15 talks in Copenhagen, you want to make sure you’re positioned to profit from clean energy shares heading into 2009. Learn more about GCI’s COP-advance plays right here.

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