The bears have woken up in emerging markets around the world. The benchmark MSCI BRIC Index — which tracks equity performance in Brazil, Russia, India, and China, the four biggest emerging markets — is down about 7 percent on the year and about 4 percent year to date. Wary of economic instability and concerned that near- and mid-term growth prospects have evaporated, investors pulled a record $26 billion from major emerging-market exchange-traded funds (ETFs) like BlackRock’s iShares MSCI BRIC Index Fund (NYSEARCA:BKF) and Vanguard’s FTSE Emerging Markets ETF (NYSEARCA:VWO) over the past year, according to data compiled by Bloomberg.
The outflows reflect a particularly challenging environment for investors. The U.S. Federal Reserve’s aggressive monetary strategy stimulated yield-seeking investments in emerging markets. Now that quantitative easing is being wound down, the dollars are coming back, as evidenced by record outflows from emerging-market funds.
Agitating the situation are myriad other headwinds, from geopolitics in Russia to financial frothiness in China, which have spooked many investors. The BRIC countries no longer appear to be offering returns worth the risk, and the flood of yield-seeking money that washed into these emerging markets in the wake of the financial crisis is beginning to wash back out.
Investors, sensitive to the evolving monetary environment, have been not-too-quietly moving their money into markets expected to experience faster growth in the coming years, such as frontier markets. Frontier markets are even less established than emerging markets, and therefore generally offer more potential reward at a higher risk level. The performance of frontier markets is also rarely correlated with more established markets, making them an attractive investment for diversification.
Here’s a look at a couple of interesting frontier market ETFs.
1. Guggenheim Frontier Markets ETF (NYSEARCA:FRN)
Guggenheim’s Frontier Markets ETF is a generally passive index ETF that tracks the BNY Mellon New Frontier DR Index. The fund currently has about $82 million invested in 37 securities, heavily weighted toward South America. Just over 44 percent of the fund’s assets are invested in Chilean companies, and about 28 percent of the fund is split nearly evenly between Argentina and Columbia. By sector, the fund is focused on financials (32 percent), energy (21.8 percent), and explicitly integrated oil and gas (17.6 percent).
Unfortunately, the Guggenheim Frontier ETF has faced fairly severe headwinds and has averaged an annual return of -9.4 percent over the past three years. Much of this can be traced to the fund being overweight on South America, which has experienced fairly severe economic challenges over the past few years.
2. iShares MSCI Frontier 100 Index Fund (NYSEARCA:FM)
BlackRock’s iShares MSCI Frontier 100 Index Fund has nearly $600 million in assets invested in 103 companies. The fund is mostly invested in financials (55.4 percent), followed by telecom (13.9 percent) and industrials (10.8 percent). Most of the fund’s holdings are in the Middle East, with 21.1 percent in Kuwait, 17.8 percent in the United Arab Emirates, and 17.8 percent in Qatar.
The fund has operating expenses of 0.79 percent and returned 25.6 percent in the year ended this December. Financial services companies in the Middle East are expected to capitalize on new demand as the region undergoes rapid growth and builds out its financial infrastructure.
3. Van Eck Market Vectors Vietnam ETF (NYSEARCA:VNM)
You’ve gotta be pretty hungry to invest in this ETF, but the world’s a hungry place and everybody — from the super wealthy to the moms and pops — wants returns. If you want them, the Van Eck Market Vectors Vietnam ETF is one investment to turn to.
The ETF focuses exclusively on Vietnam and is really the only option for retail investors who want a robust position in the country. The fund has about $513.1 million invested in 28 Vietnamese companies. Management charges 0.5 percent and other expenses total 0.26 percent, for a net expense ratio of 0.76 percent — expensive, but ostensibly worth the cost. The fund is up more than 15 percent this year to date, compared the S&P 500, at just 1.5 percent. If you’ve been looking for growth, this is where it is.
There are a couple of major catalysts behind this growth. One is that Vietnam has a large and very young population; another is that this population is being billed as the workforce that will replace low-wage Chinese manufacturing with even lower-wage Vietnamese manufacturing. Vietnam promises to capitalize on the same kind of manufacturing boom that helped kickstart China’s economy.
This manufacturing boom is largely tied up in the business of exporting apparel and electronics to both developed and emerging markets, meaning any traction in the BRIC countries or in major markets like the U.S. and Europe foreshadows new orders for factories in frontier markets like Vietnam.