Checking In On Frontier Markets With The PowerShares MENA ETF

Ah yes, frontier markets. So much potential and so much peril all at the same time. Frontier markets are generally considered to be a couple of notches below their emerging markets counterparts in terms of economic strength and that puts countries with the "frontier" designation higher up on the risk spectrum than a country that is deemed to be an emerging market.

To be sure, the success of frontier markets ETFs is closely correlated to the success of emerging markets ETFs. In other words, if risk appetite is high, frontier markets ETFs should see some benefit.

That means the current market environment may be less than ideal for getting involved with frontier market ETFs. One such ETF is the PowerShares MENA Frontier Countries ETF (Nasdaq: PMNA).

As stated above, PMNA would be a fine idea when investors are willing to embrace risk, but after the Dubai debt fallout, frontier markets are being viewed through a lens of skepticism.

That hampers PMNA, which allocates nearly 18% of its weight to the United Arab Emirates, where Dubai is located. Kuwait and Egypt combine for another 41% of PMNA and while Egypt is showing some signs of potential, investors that want access to this market may be better served waiting for one of the Egypt-specific ETFs that are being planned to come to market rather than getting involved with an ETF that offers exposure to other countries in addition to Egypt.

Another drawback to PMNA is the ETFs 58% weight in financials. The ETF Professor has previously acknowledged that emerging markets financials may represent a better bet than their developed market peers, but frontier market banks are a different ballgame. Regardless, the sector diversification leaves a little bit to be desired.

PMNA's expense ratio is a tad on the high side at 0.95% and the chart isn't exactly attractive as the 50-day moving average recently crossed below the 200-day line.

All that said, the Professor doesn't want to totally bash PMNA. If risk appetite is renewed, investors may be able to scoop up PMNA at a better price than where it currently trades and book some nice profits. For now, it may be best to stay away from it.