Market Overview

Frontier Markets ETFs Soared in May

Frontier Markets ETFs Soared in May

The iShares MSCI Frontier 100 ETF (NYSE: FM) is proving Thursday's massive volume spike was not a fluke. Along with some other frontier markets ETFs, FM touched a new high yesterday on stunning volume. In the case of FM, the ETF traded more than 30 times its trailing 90-day average turnover. FM has "slowed down" a bit Friday to trade nearly quadruple its daily average.

More important than the volume spike in FM is performance. May will go down as a dreadful month for major diversified emerging markets with the Vanguard FTSE Emerging Markets ETF (NYSE: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSE: EEM) on pace to close the month with losses of three percent. On the other hand, frontier markets ETFs have not just held up, they have shined.

At the start of trading Friday, FM was sitting on a May gain of 5.6 percent. The more regionally focused WisdomTree Middle East Dividend Fund (NASDAQ: GULF) entered Friday with a monthly gain of 3.4 percent. Both ETFs are benefiting not only from Dubai being one of the world's top-performing equity markets this year, but from speculation that index provider MSCI (NYSE: MSCI) will elevate Qatar and the United Arab Emirates to emerging markets status from frontier territory when the annual index reclassification is unveiled on June 11.

FM and Gulf are not the only frontier markets ETFs that buyers stepped into this month. Helped by an interest rate cut that was made possible by cooling inflation and news that a bad debt asset management company is finally coming to fruition, the Market Vectors Vietnam ETF (NYSE: VNM) will likely finish the month of May with a gain of more than eight percent. VNM was up 10.5 percent for the month before Friday, but is currently down 1.5 percent.

The newly minted Global X Nigeria Index ETF (NYSE: NGE), an ETF some have said has failed to "gain traction" with investors, has been another pleasant frontier markets surprise. Even with Friday's loss of just over one percent, NGE is still in position for a May gain of nearly 10 percent.

NGE, the lone ETF exclusively devoted OPEC member Nigeria, has shaken off news of declining crude production and slack global economic headlines. Said another way, NGE will close May with an impressive gain even after Royal Dutch Shell (NYSE: RDS-A), one of the largest Western operators in the oil-rich country, had to slash production there by 130,000 barrels per day due to rebel attacks in the Niger Delta.

Compelling valuations and new avenues for economic growth are among the reasons investors are taking note of frontier economies. Additionally, many frontier markets are less export-dependent than some of the marquee emerging markets investors have previously favored.

"Companies in frontier markets tend to just focus on demand in their local countries and thus are less tied to the global economy than emerging markets like China and Brazil," said iShares Global Chief Investment Strategist Russ Koesterich in a blog post. "This means frontier markets have exhibited a low correlation to emerging and developed markets and can add some diversification to a portfolio."

Following the bullish May performances, diversified frontier markets ETFs face some challenges, including the perception that valuations are frothy and the possibility that MSCI will not upgrade Qatar and UAE. Oil market volatility is an ever-present issue for NGE as is banking system fragility for VNM.

Those issues highlight the fact that frontier markets are riskier than their emerging counterparts, but recent price action underscores the profit potential offered by these less developed economies.

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