Top 3 ETFs to Access High-Growth Frontier Markets

While countries like China, Mexico, and Brazil frequently dominate the emerging markets conversation, savvy investors are increasingly turning their attention to "frontier markets." These markets sit between less-developed countries and traditional emerging economies, offering unique growth potential. As of January 2018, frontier market equities reached a combined market capitalization exceeding $700 billion—their highest in a decade—and have recently begun outperforming emerging markets for the first time in three years, according to Bloomberg. (For further insights, see: The Difference Between Emerging and Frontier Markets.)

The surge in interest stems from significant macroeconomic reforms within these smaller developing nations. Examples include Argentina’s comprehensive tax reforms, Vietnam’s privatization initiatives, and currency liberalization efforts in Morocco and Nigeria. A Blackfriars Asset Management Ltd. equities head in London highlighted that while rising oil prices play a role, targeted reforms like currency adjustments are key drivers behind specific market performances.

Investors looking to diversify into frontier markets can do so efficiently and cost-effectively through exchange-traded funds (ETFs). Below are three ETFs that provide compelling exposure to these dynamic markets. (Also see: 5 Emerging Market Equity ETFs to Watch in 2018.)

iShares MSCI Frontier 100 ETF (NYSEARCA: FM)

Launched in 2012, the iShares MSCI Frontier 100 ETF aims to replicate the performance of the MSCI Frontier Markets 100 Index by investing primarily in its constituent securities. This index tracks untapped, high-growth frontier markets as classified by MSCI Inc. Notable holdings include National Bank of Kuwait SAKP (5.93%), Vietnam Dairy Products JSC (4.44%), and Kuwait Finance House KSCP (4.36%). The ETF holds a diversified portfolio of 118 stocks.

With $565.9 million in assets under management (AUM), FM charges an expense ratio of 0.8%, slightly above the category average of 0.58%, but compensates investors with a strong dividend yield of 4.19%. Over the past five years, FM has delivered a 4.09% return and 1.93% over three years. Year-to-date through August 2018, the fund returned -10.65%. (Learn more about expense ratios in When Is an Expense Ratio Considered High and When Is It Considered Low?)

Invesco Frontier Markets ETF (NYSEARCA: FRN)

Established in 2008, the Invesco Frontier Markets ETF seeks to track the BNY Mellon New Frontier Index by investing predominantly in its components. The fund includes both American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) from frontier nations. Its portfolio consists of 68 stocks, with top holdings like Copa Holdings SA Class A, KAZ Minerals PLC, and Safaricom PLC representing 20.55% combined.

FRN manages $66.19 million in assets and charges a 0.7% annual management fee. As of August 2018, its annualized returns over 10, five, and three years are -2.93%, 0.3%, and 4.61%, respectively. The fund has returned -7% year-to-date and offers a 3.86% dividend yield. (Additional info: What Are Frontier Markets?)

Global X MSCI Argentina ETF (NYSEARCA: ARGT)

Created in 2011, the Global X MSCI Argentina ETF tracks the MSCI All Argentina 25/50 Index by investing at least 80% of its assets in securities from the benchmark. This fund focuses on companies headquartered or primarily operating in Argentina. Key holdings include MercadoLibre Inc., Tenaris SA, Grupo Financiero Galicia SA ADR, and Globant SA.

ARGT holds $146.44 million in AUM with a 0.65% management fee. Despite a challenging year-to-date return of -23.62%, the ETF has delivered strong long-term performance, with 11.44% returns over five years and 11.04% over three years. It also provides a dividend yield of 0.65%, effectively balancing out management costs. (See also: 3 Ways You Can Invest in Argentina From the U.S.)

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