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Why The Frontier Markets ETF Slumped Last Year

January 4, 2016 9:07 am
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Plenty of investors the tale of woe pertaining to emerging markets equities and exchange-traded funds last year. The iShares MSCI Emerging Markets Indx (ETF) (NYSE: EEM), the second largest emerging markets ETF by assets, slumped nearly 17 percent last year, but frontier markets stocks and the corresponding ETFs were not any better.

In fact, frontier equities were worse than their emerging counterparts, as highlighted by last year's 18.3 percent slide for the iShares MSCI Frontier 100 ETF (NYSE: FM). Home to nearly $480 million in assets under management, the iShares MSCI Frontier 100 ETF is widely considered the benchmark frontier markets ETF.

Related Link: Frontier Markets Look To Shake Oil Blues

The Index And The Fund

Some market observers blame FM's 2015 woes on the construction of the MSCI Frontier Markets 100 Index, the ETF's underlying benchmark. Like many emerging markets indexes, the MSCI Frontier Markets 100 Index is heavy on financial services stocks – as is FM, with the ETF allocating nearly 51.6 percent of its weight to that sector, according to iShares data.

“The MSCI Frontier Market index is nearly 54 percent weighted toward financials, with almost 10 percent in the hard-hit energy sector. Consumer discretionary stocks make up less than half a percent,” according to CNBC.

A money manager interviewed by CNBC noted that the frontier index is lightly allocated to consumer stocks and that the frontier markets consumer is “the big story.” That is a criticism some investors have previously aimed at widely emerging markets indexes as well. FM devotes just 7.5 percent of its weight to consumer staples stocks and a meager 0.23 percent to consumer discretionary names.

While FM's sector weights are legitimate concerns, another issue that cannot be glossed over when it comes to the ETF's recent struggles is oil's downward spiral. That issue can be somewhat obfuscated by FM's relatively light 10.8 percent weight to the energy sector, making that group the ETF's third largest sector exposure.

However, what cannot be obfuscated is FM's heavy geographic exposure to the Organization of Petroleum Exporting Countries (OPEC). Kuwait and Nigeria, both OPEC members, combine for about 38 percent of FM's weight and are the ETF's largest and third-largest country weights, respectively. That means, regardless of its energy weight, FM is exposed to oil prices. That is not a positive. Just look at the impact slumping oil prices have had on Nigerian stocks. The Global X MSCI Nigeria ETF (Global X Funds (NYSE: NGE)) plunged 33 percent last year.

Other single-country frontier markets ETFs slumped last year as well. The Global X MSCI Pakistan ETF (Global X Funds) (NYSE: PAK)) slid nearly 16 percent, while the Market Vectors Vietnam ETF. (NYSE: VNM) lost 23 percent. Pakistan and Vietnam combine for 13.6 percent of FM's weight.

Image Credit: Public Domain

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