How long can you call something a frontier after it has been labeled as such? Generally speaking, frontiers are anything but static. With all the investor attention they are suddenly getting, this could become an issue with frontier markets.

Merrill Lynch has just become the latest company to rush back from the fringes of international investment with its own frontier index. Surely it was just last year when there was only one player in that field-Standard & Poor's with the stable of emerging markets indexes it had acquired from IFC.

Merrill Lynch Global Research rolled out the Merrill Lynch Frontier Index on Wednesday. It covers 50 of the largest and most-traded companies from 17 countries in Asia, Africa, Europe and the Middle East. The list includes companies from countries like Nigeria, Cyprus, Kazakhstan, United Arab Emirates and Morocco. Vietnam, one of the most spectacular frontier market success stories, is also included in the index. Stocks eligible for inclusion have a minimum market capitalization of $500 million and a minimum three-month average daily turnover of $750,000. They must also have a foreign ownership limit of more than 15%.

Diversification and noncorrelated returns are the main argument for investing in frontier markets. The Merrill Lynch press release covering the new index says that frontier markets have just a 32% correlation with the S&P 500, while emerging markets have a correlation of 73% with the S&P 500. Developed markets, as expected, have the highest correlation-but 96% is rather breathtaking nonetheless.

However, it's not just "different" returns that are attracting investors, but the potential for higher ones as well. With the stunning growth of countries like China, India and even Vietnam, no doubt many are hoping to get in at the ground floor of the next spectacular growth story. Frontier markets may be higher-risk investments, but generally they are also seen as economies in which there is a lot more potential for upside than downside. For example, starting in January 2000, they have exhibited annualized returns of about 20%. Meanwhile, emerging markets had returns of 12%, and developed markets, 1%.

"Frontier equity markets offer investors a unique opportunity to diversify their portfolio as well as to benefit from what we believe will be the markets' significant long-term growth potential," said Henry Hall, Merrill Lynch's head of Global Emerging Market Equity Linked Sales, Structuring and Financing, EMEA.

The Merrill Lynch Frontier Index has a heavy weighting in the Middle East, which makes up roughly half of the index. Two of the top three countries are from that region-UAE, with a weighting of 23.1%, and Kuwait, with a weighting of 18.1%. Pakistan is the third-largest country at 13.6% of the index. Asia as a whole represents 22.6% of the index; Europe, 14.1%; and Africa, 13.3%.

The S&P/IFCG Extended Frontier 150 Index, probably the new index's most comparable competitor, has more components, but UAE and Kuwait also are among its top three countries at 11.87% and 15.00%, respectively. Nigeria falls between them in second place, with a weighting of 12.00%. However, the S&P index also includes Latin America in its coverage: Colombia, the only Latin American country in the index, is the fourth-largest country at 10.28%

The three most important sectors in the Merrill Lynch Frontier Index provide an interesting silent commentary on what is driving the development and growth of frontier markets. Banks are the largest sector at nearly 40% of the index, while financial services companies are the next-largest at roughly 26% of the index. Oil and gas firms are 13.6% of the index.

Despite the fact that Merrill Lynch is not the first to market with this sort of product-that would be S&P with its prescient purchase of its frontier and emerging market indexes about a decade ago-it is one of the early players in an underserved area that faces increasing demand. MSCI only recently launched its own frontier indexes, and FTSE has been suggesting that it may also launch its own series within a year.