MSCI recently launched the latest sally in the frontier indexing scramble with the rollout of the MSCI Frontier Emerging Markets Index and the MSCI Frontier Emerging Markets APEX Index.

With diversification-hungry investors waking up to smell the frontier markets coffee only recently, index providers are crowding into a space that had previously been occupied almost solely by Standard & Poor's and the indexes it acquired from the IFC.

FTSE and MSCI have only recently begun to add frontier markets to their global index families, and Dow Jones, another major index provider, is dabbling in the area through its DJ Titans index family.

MSCI's newest products, however, combine frontier markets with some of the less-developed emerging markets into a single index. The idea is that some countries that fit the criteria for emerging markets nonetheless behave more similar to frontier markets.

Frank Nielsen, executive director of MSCI's Americas Index and Applied Research group, noted that the indexes are the result of investor demand.

"The idea behind the MSCI Frontier Emerging Markets Index is to combine a set of countries in which the capital markets, investment restrictions and operational efficiencies are more homogeneous. At the same time, it offers the benefit of additional diversification which more advanced emerging markets may not provide to the same degree," he said.

"Since we developed the emerging markets designation 20 years ago, many of those original countries in the MSCI EM have seen significant development and growth in their economies and capital markets. Some of the companies listed on those markets now compete at the global level," he pointed out.

"Some of the bigger emerging markets, certainly from a risk/return perspective, look relatively similar to developed markets. Certainly some have a higher degree of correlation to some developed markets than others," Nielsen added. At the same time, he said, "other emerging countries have not seen their capital markets develop at the same pace and more closely resemble frontier markets in many respects."

The two new indexes include a broad benchmark and an investable, narrower index that is marketed under the APEX name, similar to a narrow index covering Asia launched earlier this year. The broad index covers 27 countries, including eight emerging markets: Argentina, Colombia, Egypt, Jordan, Morocco, Pakistan, Peru and the Philippines. Meanwhile, the APEX index includes both those emerging markets and the frontier markets, except for Mauritius, Sri Lanka, Ukraine and Vietnam for the purposes of investability.

"It excludes these four countries because of operational inefficiencies and tradability difficulties in these markets," said Nielsen.

As of September 17, that works out to a difference of 25 companies in terms of component counts, with the broad index covering 224 companies and the narrow index covering 199. (See table.)

The top five sectors of the broad index are Financials (at 50% of the index), Telecommunications (14%), Energy (11%), Materials (10%) and Industrials (8%). The other sectors all represent 2% or less of the index, and Information Technology is the only one with a weighting of 0%.

Both indexes have the same top five components: Mobile Telecom Co. (Kuwait), Tenaris (Argentina), Kuwait Finance House (Kuwait), National Bank of Kuwait (Kuwait) and Emaar Properties (United Arab Emirates). Just to give an idea of how similar the weightings actually are, largest component Mobile Telecom Co. carries a 5.52% weight in the broad MSCI Frontier Emerging Markets Index and a 5.98% weight in the MSCI Frontier Emerging Markets APEX Index.

There's not a lot of competing indexes in this area, but S&P does have a similar index in its own lineup. The S&P/IFCG Extended Frontier 150 Index includes 150 companies from S&P's frontier markets and its emerging markets that are not part of its "investable" index series. At the start of 2008, the index included stocks from 27 countries, although the list is quite different from that of the MSCI Frontier Emerging Markets Index.

The new, broad index from MSCI and the S&P/IFCG Extended Frontier 150 have 20 countries in common, but while the MSCI index includes companies from Argentina, Egypt, Mauritius, Morocco, Peru, the Philippines and Tunisia, the S&P index includes companies from Bangladesh, Cambodia, Côte d'Ivoire, Cyprus, Georgia, Lithuania and Panama.

The differences in coverage reveal just how subjective these smaller areas of the market can be and the fact that there are not yet any universal standards across the industry.