The Competition

But FRN was not the only frontier markets ETF in the works: Invesco PowerShares has the PowerShares MENA Frontier Countries Portfolio in registration. It announced that the launch of the fund was imminent just yesterday, although the exact date is unknown—or at least not yet public. The fund is expected to list on the NASDAQ Stock Market under the symbol PMNA. Van Eck also has several Market Vectors ETFs in registration that cover various frontier markets, including a global frontier fund and others covering Africa, the Middle East and Vietnam, but there has been no indication as to when those ETFs will launch. (Read the prospectus for the Van Eck funds here.)

The PowerShares ETF tracks the NASDAQ OMX Middle East North Africa Index, which currently includes securities from Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and the United Arab Emirates. Like FRN's underlying index, PMNA's underlying index also includes some countries some of the major index providers would classify as "emerging," such as Egypt, Jordan and Morocco.

Like FRN's underlying index, PMNA's underlying also has liquidity screens in place. Companies must have market capitalizations of at least $200 million and a three-month average daily value traded of at least $1 million. Although the World Bank identifies 18 countries in the MENA region, only the nine listed previously have stocks that meet the index's liquidity criteria.

The fact that the ETF is focused on the Middle East and North Africa means that a large number of frontier markets from South America, Europe and Asia are excluded. PMNA provides more concentrated exposure to two particular regions rather than the broad spectrum of frontier markets. When it launches, it seems likely that its audience will be somewhat different from that of FRN—investors looking to diversify their portfolios on a regional basis or to make a regional bet rather than investors more focused on simply diversifying into a previously unreachable subset of the emerging markets asset class.

(Read the prospectus for PMNA here.)

Why Frontier Markets?

So what's so great about frontier markets? Obviously something, or there wouldn't be a competition for first place in the race to get the first frontier market ETF listed and trading.

Magoon identified three key characteristics of frontier markets that make them attractive to investors: 1) rapid economic growth in terms of GDP, 2) low-to-no correlation with other emerging markets and developed markets, and 3) above-average potential risk paired with above-average potential returns.

Developed markets, hit by the credit crunch among other issues, are looking at GDP growth somewhere between 1% and 3%, Magoon said, while frontier markets are looking at growth ranging from 5% for some markets to 12% for markets such as Georgia. Meanwhile, more developed emerging markets are showing correlations of 0.6 to 0.7 with developed markets when frontier markets' correlations are closer to 0.3.

"I think investors are always looking for an investment that zigs when some of their other investments zag, and I think the low-to-no correlation is a big deal," Magoon commented.

PowerShares Senior Vice President of Portfolio Strategies Ed McRedmond agrees.

"There's the belief that anything outside the U.S. is going to provide you with some asset allocation benefits, but obviously what we've seen over the years with some of the foreign markets is that the correlation has gotten somewhat higher to the U.S market as those markets have developed and become more intertwined with the U.S. market," he noted, adding that the MENA markets are one of the areas that still offer very low correlation to the U.S. market and other foreign markets.

"Because frontier markets have shown such a low correlation to the U.S. markets and to some of the traditional developed market indexes such as EAFE, we believe it's a nice component to someone's portfolio. Any time you can add something to your portfolio that may have a lower correlation to everything else that's in there, over time that may reduce the overall volatility and risk of the entire portfolio," McRedmond said.

Beyond the potential benefits to be found in frontier markets lies the question of how exactly they fit into an investor's portfolio. Claymore's Magoon seems to view it almost as a missing puzzle piece.

"We see it as part of the emerging markets' weighting in an investor's portfolio and a complement to investors' traditional emerging markets investments," Magoon said. "The typical emerging markets investor is getting exposure to more developed emerging markets and not really getting these embryonic emerging markets."

Although that exposure was previously hard to come by, it looks like Claymore is riding the crest of what will be a wave of products designed to give investors access to the most obscure parts of the investable world.

1 | 2 |