iShares Adds Some Frontier to Frontier Markets ETF

Let's dispense with a couple of disclaimers to start. In

we reported that BlackRock's

iShares, the world's largest ETF sponsor, had filed plans for the iShares MSCI Frontier Emerging Markets Select Index Fund. Second, tip of the cap to

for noting the still-to-be-released ETF will be more frontier in its approach. In December, it looked liked the fund would track the MSCI Frontier Emerging Markets Select Index. As of mid-October, constituent countries in the index were Argentina, Bangladesh, Bulgaria, Colombia, Croatia, Egypt, Estonia, Jordan, Kazakhstan, Kenya, Kuwait, Lebanon, Lithuania, Mauritius, Morocco, Oman, Pakistan, Peru, the Philippines, Qatar, Romania, Serbia, Slovenia, Sri Lanka, Tunisia and the United Arab Emirates. As Index Universe reported, if the fund comes to market, it will track the MSCI Frontier Markets 100 Index. As is the case with so many emerging markets indexes, the MSCI Frontier Markets 100 Index is heavily allocated to just a few countries. Kuwait, Qatar, and United Arab Emirates combine for about 59% of the index's weight. That factor alone might give some investors cause for concern regarding the iShares MSCI Frontier Emerging Markets Select Index Fund and that's before it even debuts. First off, there are ETFs already on the market offering large weights to Kuwait, Qatat and UAE. In this order, Qatar, Kuwait and UAE account for almost 82% of the WisdomTree Middle East Dividend Fund

. The next factor to consider is that the Qatar and UAE could be promoted to developed markets status this year and if that happens after the new iShares frontier fund comes to market, investors could potentially be in for some

. Next there is the fact that the index features scant exposure to Vietnam at less than 2.2%. Vietnam has been a

and is arguably the most investable frontier market for U.S. investors. The fact that MSCI Frontier Markets 100 Index doesn't feature a bigger allocation to this burgeoning market is an issue to note and could prompt some investors to dodge the ETF altogether and opt for the Market Vectors Vietnam ETF

. The new iShares ETF would, upon debut, also face competition from the PowerShares MENA Frontier Countries ETF

and the Guggenheim Frontier Markets ETF

. No surprises here as Qatar, Kuwait and UAE combine for almost 59% of PMNA's weight though all of PMNA's country exposure is Middle East/North Africa, so its reasonable to expect the new iShares fund will be a bit more diverse at the sector level. For its part, FRN struggles to be a legitimate frontier markets play as Chile, Colombia and Peru combine for almost 61% of that fund's weight and all have emerging markets status. The bottom line is the shift to a more frontier markets approach is a good idea by iShares and it could make its frontier fund a legitimate threat to FRN and PMNA. That said, increased exposure to Vietnam and Eastern European frontier markets could make for a better fund. For more on frontier market investing, please click here

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