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The iShares MSCI Frontier Emerging Markets Select Index Fund, like EEM, would track an MSCI benchmark, this one comprising securities from 26 frontier markets spanning the globe. The fund will include Latin American countries such as Argentina and Colombia as well as Middle Eastern countries such as Oman, Qatar and the United Arab Emirates, the company said in paperwork it filed with U.S. regulators this week.
The broad frontier market ETF wouldn’t include exposure to Vietnam, but iShares is looking to tap into that economy through a separate fund, the iShares MSCI Vietnam Investable Market Index Fund. It would also be designed around an MSCI benchmark, the company said in a separate filing it made this week.
iShares appears to be the first ETF sponsor to unveil plans to create a broad frontier markets fund. And the time appears ripe, with investors clearly getting used to emerging markets investment—as rising correlations between developing-market and developed-market movements suggest.
Both funds are expected to track their benchmarks through representative sampling, meaning they won’t own all the securities in their respective indexes. This doesn’t seem surprising, since buying and selling certain stocks on many frontier-market bourses is likely to be quite difficult and expensive.
Still, EEM boasts nearly $35 billion in assets and remains proof that investor demand for strategies that look beyond the sluggish U.S. economy and tap into developing—and frontier—markets where much of the prospective growth and value opportunities are today remains unwavering.
A Changing Landscape
The key to emerging and frontier market equities is accessibility, and changes to domestic policies and market practices keep the frontier market landscape constantly changing.
MSCI, as one of the world’s largest index providers, as well as the indexer of choice for these iShares funds, is constantly assessing how accessible a market is to classify countries as developed, emerging or frontier.
The company’s annual reclassification review is crucial to ETFs such as EEM; its rival fund, the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO); and now these frontier funds. MSCI’s rulings determine which country ends up in what kind of fund, often involving the shift of millions if not billions in assets.
Earlier this year, it ruled that Qatar and the United Arab Emirates, for instance, would remain pegged as frontier at least through the end of this year, but alluded to the fact that these two countries ought to be shifted to emerging market status.
If that were to be the case, they would be dropped from iShares’ planned frontier fund. MSCI will look at reclassification of the two Middle Eastern countries on Dec. 14.
The MSCI Frontier Emerging Markets Index is a free-float-adjusted market-capitalization-weighted portfolio diversified in scope, picking from companies across multiple sectors such as energy, financial, material and telecommunication services.
By contrast, the MSCI index underlying the Vietnam fund consists of stocks traded primarily on the Hanoi and Ho Chi Minh Stock Exchanges, and current components include companies in the financial, industrial and material sectors, the filing said.
iShares didn’t disclose proposed tickers or fees for either fund.