Key Takeaways

  • Frontier markets can provide meaningful growth potential and additional diversification
  • Consider frontier markets as a long-term strategic allocation, but exercise caution in the near-term
FM

iShares MSCI Frontier 100 ETF is the only dedicated frontier market ETF based on MSCI's country classification


We believe that investors should consider emerging markets (EM) exposure as part of the long-term core of a diversified portfolio. In mid-2014 we noted an opportunity in frontier markets (FM) based on near-term momentum and valuations, which may have been attractive to EM investors looking to expand their international footprint. However, given recent volatility driven by low oil prices, a strong U.S. dollar and continued political instability in some of the largest FM countries, we urge investors to proceed with caution in the near-term. We continue to believe in FM as a potential long-term growth opportunity, but caution that near-term volatility could exceed the risk tolerance of many investors.

Background: Frontier Markets

Countries classified as “Frontier Markets” are at relatively early stages of development. As a result, these markets can potentially offer growth opportunities and increased diversification for investors. However, they may also have greater political instability, which may result in increased volatility versus developed markets.

Below is a closer look at the reasons we believe in the FM investment case over the long term.

DEVELOPED, EMERGING AND FRONTIER MARKET COUNTRIES

Map of Developed, Emerging and Frontier Market Countries

Potential for long-term growth

In contrast to the aging and shrinking populations of many Developed Market (DM) and EM countries, the populations of FM countries are generally young and growing. FM countries:

  • Represent 30% of global population and have above average income growth1
  • Are forecasted to be among the world’s fastest growing economies
  • Generally have untapped natural resources which could spur job creation and increased consumption

A true diversifier

Taken as a whole, frontier markets have had a fairly low correlation to both DM and EM returns, and can potentially serve as a significant diversifier. While individual frontier market countries can be quite risky, the fact that they have shown only modest correlations to each other over a five year period can have the effect of minimizing overall risk. 2

Index Correlation
S&P 500 TR MSCI ACWI MSCI EAFE MSCI EM
5 Year Correlation
to MSCI FM 100
0.47 0.52 0.51 0.44

Correlation measures how two securities move in relation to each other. Correlation ranges between +1 and -1. A correlation of +1 indicates returns moved in tandem, -1 indicates returns moved in opposite directions, and 0 indicates no correlation.


Investing in Frontier Markets

Investors with a high risk tolerance may want to consider exposure to frontier markets for the long-term. The iShares MSCI Frontier 100 ETF (ticker: FM) provides access to 100 of the largest, most liquid frontier market stocks (in underdeveloped financial markets where liquidity is key). It also has the distinction of being the only pure frontier markets ETF based on MSCI classifications.

1. IMF
2. MSCI, BlackRock, as of 3/31/15.

How to Buy iShares ETFs

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets or in concentrations of single countries.

Frontier markets involve heightened risks related to the same factors and may be subject to a greater risk of loss than investments in developed and emerging markets.

Diversification and asset allocation may not protect against market risk or loss of principal.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The information provided is not intended to be tax advice.  Investors should be urged to consult their tax professionals or financial advisors for more information regarding their specific tax situations.

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