One ETF the Fed's Actions Won't Affect

By John Whitefoot

While the S&P 500 continues to perform well, the markets have been skittish since May 22, when the Federal Reserve hinted it might consider tapering its $85.0-billion-per-month bond-buying program. If Ben Bernanke begins to curtail Wall Street’s monthly allowance, there are fears the markets will not be able to stand on their own economic merit.

Granted, many don’t think the Fed will begin tapering in 2013; this may account for the S&P 500’s solid, yet volatile run. The same can’t be said for emerging markets.

Investors have pulled over $22.0 billion from emerging-market bond funds since the end of April. This has lifted emerging-market bond yields by 1.4 percentage points, almost the most in five years.

Borrowing costs have been on the rise from record lows as speculation swirls around when the Federal Reserve will begin to cut back its quantitative easing measures—this also means the end of artificially low interest rates. This matters to emerging markets, because it signals the end of cheap money that’s been propping up asset prices in countries like India, China, and Indonesia.

Those investors who diversified their retirement fund with emerging-market exchange-traded funds (ETFs) have been in for a rough ride. The MSCI Emerging Markets Index (NYSE/EEM) is down eight percent year-to-date.

One of the few places where the Federal Reserve’s sphere of quantitative easing influence is muted is in the world of frontier markets. Frontier markets refer to countries such as Argentina, Kenya, Qatar, and Vietnam—those markets that are in the early stages of development. Frontier markets are an attractive opportunity for investors, because they represent a long-termeconomic growth possibility. And there is plenty of room for growth. In fact, 22 of the 25 fastest-growing economies over the next five years are expected to be in frontier markets. (Source: Larrabee, D., “Frontier Market Investing: Inefficiency Equals Opportunity,” CFA Institute web site, May 3, 2012.)

That said, frontier markets are for more seasoned investors, or those who are not afraid to go against the herd. That’s because frontier markets represent just 20% of the world’s population, and only 10% of global gross domestic product (GDP). On top of that, frontier market stocks consist of just two percent of global market capitalization. (Source: Larrabee, D., “Frontier Markets Faring Better than Emerging Markets,” CFA Institute web site, September 4, 2013.)

Still, frontier market ETFs have been providing investors with some interesting opportunities. Aside from individual shares trading on frontier market stock exchanges, investors might want to diversify their exposure and decrease their risk through an ETF.

The iShares MSCI Frontier 100 Index FM contains over 100 securities in some of the strongest frontier markets, including: Kuwait, Qatar, Nigeria, Kenya, Kazakhstan, and Vietnam. This frontier market ETF is up roughly 12.5% year-to-date and is down only 1.5% since May 22, when the Fed said it would eventually begin tapering its quantitative easing.

Again, frontier market stocks and ETFs are not for everyone. They are probably best suited for contrarian investors who are comfortable running against the herd. That said, frontier markets can provide ample opportunities for growth for patient investors looking for long-term growth.

This article One ETF the Fed’s Actions Won’t Affect was originally published at Daily Gains Letter