iShares MSCI Frontier 100 (FM) [ER 0.79%]

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iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Fri Mar 22, 2013 11:33 pm

Anybody own this? Just Curious.

Here is an article regarding "frontier markets" that mentions "iShares MSCI Frontier 100 (FM)."

http://seekingalpha.com/article/1295411 ... ng-markets

morningstar

http://portfolios.morningstar.com/fund/ ... ture=en-us

thanks
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Fri Mar 22, 2013 11:57 pm

Hi xram,

I think this fund is a definite improvement over previous frontier market funds (some of which had most of their holdings in countries already included in Vanguard's EM index). This ETF is actually FM and has a reasonable E/R (for the asset class). But it still has some diversification issues, IMO: 1) about half its holdings in three gulf countries (Kuwait, Qatar, UAE)--what happens if the price of oil crashes or some geopolitical issue happens? 2) about half of its holdings in financials.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby Barry Barnitz » Sat Mar 23, 2013 4:07 am

Hi:

Also refer to our wiki page: Frontier market stocks - Bogleheads.

regards,
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby grabiner » Sat Mar 23, 2013 2:09 pm

baw703916 wrote:This ETF is actually FM and has a reasonable E/R (for the asset class). But it still has some diversification issues, IMO: 1) about half its holdings in three gulf countries (Kuwait, Qatar, UAE)--what happens if the price of oil crashes or some geopolitical issue happens? 2) about half of its holdings in financials.


The diversification of a single fund isn't that important; what matters is the diversification of your whole portfolio, and a fund like this should probably be only 5% of your portfolio. If the price of oil crashes, the 2.5% of your portfolio which is in the Gulf states will do badly, but that shouldn't be a serious concern, any more than the fraction of your portfolio which is in American and European oil companies is.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby stan1 » Sat Mar 23, 2013 2:28 pm

The maximum bid/ask spread on this ETF from Oct-Dec 2012 was 3.4377% (343 basis points)! There were ZERO days out of 62 where it was trading at a discount, and even ZERO days where it was trading at a premium of less than 1.5% (150 basis points). Most days the premium was over 2.0%.

http://tools.ishares.wallst.com/ishares ... ?symbol=FM

Maybe it will get better over time, but for now taking a 2-3+% haircut upfront plus 0.79% ER plus the fact that BlackRock is unlikely to ever lower expenses makes this a tough proposition for over TISM + VSS.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby pauliec84 » Sat Mar 23, 2013 2:44 pm

0.79 ER doesn't seem unreasonable given the context. Small cap EM has about that ER, as does Microcap.

I would take FM anyday over Microcaps, and think it would be comparable to emerging market small cap in terms of expected return and correlations.

With that said the 2-3% upfront haircut is the deal breaker. Until that comes down, no thank you.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby Valuethinker » Sun Mar 24, 2013 4:33 am

http://us.ishares.com/product_info/fund/overview/FM.htm

is more helpful than Morningstar.

Yes in the top 4 markets Nigeria is only 13-14%. The rest is Middle East.

Qatar is primarily a gas economy rather than an oil one. Gas is long term contracts (although influenced by spot oil and spot LNG prices) so the vulnerabilities are less than say with Saudi Arabia (where foreign ownership of equities remains illegal, I believe) to swings in the oil prices. Iran, however, is just across the Strait of Hormuz, so geopolitical sensitivities quite large.

You really don't get a lot of the sort of sub Saharan Africa etc. that you would want in a true 'Frontier' fund.

Note PE 16x and price to book 2.2x

Not cheap.

Frontier markets have tiny liquidity. Something like $60bn in *total* market cap. Relatively small inflows from foreign investors can push PEs to high levels.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby gtwhitegold » Sun Mar 24, 2013 5:47 am

The assumption that energy companies are a large portion of the FM 100 is not true. Financials are by far the largest area. This is due to most resource plays being owned by the host nation and either being extracted by the host nation or under contract from the host nation. Until they do develop into emerging markets, this will likely remain the case. If the countries begin to commercialize the energy sector, then that will quickly change. Otherwise, sectors involved with industrialization and modernization will continue to rapidly expand and should eventually overcome the financials sector.

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby Valuethinker » Sun Mar 24, 2013 12:43 pm

gtwhitegold wrote:The assumption that energy companies are a large portion of the FM 100 is not true. Financials are by far the largest area. This is due to most resource plays being owned by the host nation and either being extracted by the host nation or under contract from the host nation. Until they do develop into emerging markets, this will likely remain the case. If the countries begin to commercialize the energy sector, then that will quickly change. Otherwise, sectors involved with industrialization and modernization will continue to rapidly expand and should eventually overcome the financials sector.

Allen


Generally the pattern is the National Oil Companies (NOCs) buy in the technology from the likes of Schlumberger, bypassing the Multinational Oil Companies (MNOs). So that's not a way to listing either. You do get some Exploration & Production plays listed in London, drilling in say, Africa. And also the likes of Glencore (mining in Democratic Republic of Congo, etc.).

It's not clear to me that Frontier Markets will emerge in the fashion you describe. However one remains optimistic, at least for the sub Saharan economies if not the stock markets.

The Muddle East is the the Muddle East. I don't think the direction of things is ever truly clear.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby pauliec84 » Sun Mar 24, 2013 1:10 pm

This story telling doesn't get you anywhere in terms of making actionable investment decisions.

The relevant issues are:

What is the expected return of asset?
What is the riskiness of the asset?
How does the asset's risks co-vary with other assets in your portfolio?

Per this Vanguard report: https://personal.vanguard.com/pdf/s357.pdf

It seems to do well in all these categories:

A nice result from vanguard that seems to be similar to the international small-cap puzzle:
"frontier markets were much less correlated among themselves than were either emerging markets or developed markets (see Figure 7, on page 8). All else equal, the lower the cross-correlations between countries within an index, the lower the index’s overall volatility owing to the power of diversification."
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby Valuethinker » Sun Mar 24, 2013 1:37 pm

pauliec84 wrote:This story telling doesn't get you anywhere in terms of making actionable investment decisions.

The relevant issues are:

What is the expected return of asset?
What is the riskiness of the asset?
How does the asset's risks co-vary with other assets in your portfolio?

Per this Vanguard report: https://personal.vanguard.com/pdf/s357.pdf

It seems to do well in all these categories:

A nice result from vanguard that seems to be similar to the international small-cap puzzle:
"frontier markets were much less correlated among themselves than were either emerging markets or developed markets (see Figure 7, on page 8). All else equal, the lower the cross-correlations between countries within an index, the lower the index’s overall volatility owing to the power of diversification."


Tis great that VG has crunched the numbers...

with an asset class this new I think we should be cautious that they tell us much. Total market cap less than $60bn? Note the flows now going into 'frontier markets'-- that will increase correlation.

I *do* like the idea of owning Nigerian brewers. If you have been there, you can feel the potential in sub Saharan Africa-- the human potential. It feels like some gawd-awful places did 30 years ago (Bangladesh, India, Indochina etc.)-- not a huge amount has to go right (10m mobile phones in Kenya!) for things to motor ahead. And the rest of the planet needs their demographics. Conversely I don't have that feel for the Muddle East generally-- yes there are resources there, but there is not the same resourcefulness, if you will. Egypt perhaps an exception, but with all Egypt's known issues.

I am not sure we can say much about the stocks, other than to notice that 2.x times book value ain't cheap.

This is a 'light the blue touch paper, and see what happens' investment class.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby EDN » Sun Mar 24, 2013 1:57 pm

I assure you, this fund belongs in approximately no one's portfolio. Several issues:

1. The bid/ask spreads on these companies are astronomical, and mechanically reconstituted index funds will get crushed, just like US microcaps. This figure may be double the expense ratio.

2. 5% of equities is almost a waste of time for anything. Keep to core holdings in meaningful amounts

3. The risk is off the charts. EM stocks already sport twice the volatility of US companies. How much more pain are you willing to stomach? Sure, risk and return are related, but you have to stick around to get the reward, I'm not sure many have the fortitude for 70+% capital impairments from the asset class including -100% for some of the individual countries

We know investors behave badly, and it gets worse the more volatile and concentrated your portfolio/asset classes are. Bogle found -0.8% annual underperformance for investors in the lowest quintile of funds ranked by volatility, but -3% per year for the most volatile quintile! And my guess is FMs are more volatile than even the most volatile quintile in his study!

Just wait, they'll be added to broad based EM and World exUS funds soon enough.

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Sat Apr 13, 2013 7:44 pm

stan1 wrote:The maximum bid/ask spread on this ETF from Oct-Dec 2012 was 3.4377% (343 basis points)! There were ZERO days out of 62 where it was trading at a discount, and even ZERO days where it was trading at a premium of less than 1.5% (150 basis points). Most days the premium was over 2.0%.

http://tools.ishares.wallst.com/ishares ... ?symbol=FM

Maybe it will get better over time, but for now taking a 2-3+% haircut upfront plus 0.79% ER plus the fact that BlackRock is unlikely to ever lower expenses makes this a tough proposition for over TISM + VSS.


this is probably obvious to most of the experts on here. but new to me. :D
just doing a little reading/research/learnin'

top 5 countries - FM
kuwait - 28%
qatar - 17%
nigeria - 12%
UAE - 12%
pakistan -5%

top 5 countries - VXUS
japan - 16%
UK - 15%
canada - 8%
australia - 6%
france - 6%

top 5 countries - VWO
china - 19%
brazil - 14%
taiwan - 11%
india - 8%
south africa - 8%

top 5 countries - VSS
UK - 15%
canada - 14%
japan - 12%
taiwan - 6%
australia -6%

not any overlap of top 5 countries in (FM) versus top 5 countries in (VXUS, VWO, VSS)
just providing the info to see what folks think
thanks
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Sat Apr 13, 2013 8:13 pm

xram wrote: not any overlap of top 5 countries in (FM) versus top 5 countries in (VXUS, VWO, VSS)


By definition, FM is whatever isn't DM or EM. So there shouldn't be any overlap in countries if the FM fund is truly FM, and not just duplicating the funds that are already in your EM fund. A lot of the funds that call themselves "frontier" do this and just end up being very expensive EM funds.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby stratton » Sat Apr 13, 2013 8:33 pm

baw703916 wrote:
xram wrote: not any overlap of top 5 countries in (FM) versus top 5 countries in (VXUS, VWO, VSS)


By definition, FM is whatever isn't DM or EM. So there shouldn't be any overlap in countries if the FM fund is truly FM, and not just duplicating the funds that are already in your EM fund. A lot of the funds that call themselves "frontier" do this and just end up being very expensive EM funds.

Depends on who's index. MSCI has the Gulf Cooperative Council (Kuwait etc.) in a frontier index. FTSE has it in emerging markets. As a share of FTSE ex-US the GCC states are probably about 0.5% to 1.0%. If you intend on an explicit allocation to Frontier countries then you probably slice and dice and use allocations smaller than 5% of the portfolio. 5% of stocks might be doable.

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby Occupier » Sat Apr 13, 2013 8:48 pm

I got into Emerging Markets and China quite early about 2002. It had big returns and I paid a lot of gains taxes when I reduced my allocation in 2006 and 2007 due to their becoming more popular. Maybe because of that I picked up some FM. The only other frontier etf I looked at was really just a South America fund. But I will tell you It's less than 1% of my assets and It ain't ever going to be more than 1%. So some would say why bother if that is all your going to own. Well I have been to quite a few of those countries and can see their potential. I like the idea of getting in on the ground floor. The principle attraction is the low correlation. Emerging Markets have a correlation now of in the high 70's .79 was the figure I saw in the Vanguard writeup. Frontier had a correlation in .34 or so range. So maybe it will smooth out some of the volatility in my portfolio. It also has a good dividend yield 4% or so. I rode a motorcycle from Indonesia to Europe in 1976 and rode down to South America and back last your to celebrate being retired. So some of my motivation is to own some stocks in countries were people were very nice to me when I was just a long haired two wheel traveler. Dave
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Sat Apr 13, 2013 9:28 pm

Best to hold FM in taxable? Foreign tax credit?
Thanks
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Sat Apr 13, 2013 9:30 pm

stratton wrote:
baw703916 wrote:
xram wrote: not any overlap of top 5 countries in (FM) versus top 5 countries in (VXUS, VWO, VSS)


By definition, FM is whatever isn't DM or EM. So there shouldn't be any overlap in countries if the FM fund is truly FM, and not just duplicating the funds that are already in your EM fund. A lot of the funds that call themselves "frontier" do this and just end up being very expensive EM funds.

Depends on who's index. MSCI has the Gulf Cooperative Council (Kuwait etc.) in a frontier index. FTSE has it in emerging markets. As a share of FTSE ex-US the GCC states are probably about 0.5% to 1.0%. If you intend on an explicit allocation to Frontier countries then you probably slice and dice and use allocations smaller than 5% of the portfolio. 5% of stocks might be doable.

Paul


Good point. When Vanguard used MSCI, there would have been zero overlap between FM and VWO. I'd say that actually makes this fund quite a bit less desirable, if half of the assets are in countries that are already in Vanguard's total international and EM funds.

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Sat Apr 13, 2013 9:33 pm

xram wrote:Best to hold FM in taxable? Foreign tax credit?
Thanks
Xram


I'd say it depends on the dividend yield and qualified dividend %. A lot of FM countries might not have a tax treaty with the U.S., in which case the dividends wouldn't be qualified. You should probably check on the numbers.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby stratton » Sat Apr 13, 2013 9:43 pm

baw703916 wrote:
stratton wrote:
baw703916 wrote:
xram wrote: not any overlap of top 5 countries in (FM) versus top 5 countries in (VXUS, VWO, VSS)


By definition, FM is whatever isn't DM or EM. So there shouldn't be any overlap in countries if the FM fund is truly FM, and not just duplicating the funds that are already in your EM fund. A lot of the funds that call themselves "frontier" do this and just end up being very expensive EM funds.

Depends on who's index. MSCI has the Gulf Cooperative Council (Kuwait etc.) in a frontier index. FTSE has it in emerging markets. As a share of FTSE ex-US the GCC states are probably about 0.5% to 1.0%. If you intend on an explicit allocation to Frontier countries then you probably slice and dice and use allocations smaller than 5% of the portfolio. 5% of stocks might be doable.

Paul


Good point. When Vanguard used MSCI, there would have been zero overlap between FM and VWO. I'd say that actually makes this fund quite a bit less desirable, if half of the assets are in countries that are already in Vanguard's total international and EM funds.

If you have:

40% US stocks
20% International in FTSE ex-US
40% bonds

Frontier is about 0.2% of total assets. Any weight chosen by an investor will dwarf this amount. So, yes FM would actually "matter."

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Sat Apr 13, 2013 9:51 pm

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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby patrick » Sun Apr 14, 2013 12:36 pm



It looks like the total dividend amount was zero -- so it's not too much of a problem that none of that was qualified.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby stlutz » Sun Apr 14, 2013 2:58 pm

I assure you, this fund belongs in approximately no one's portfolio. Several issues:

1. The bid/ask spreads on these companies are astronomical...

2. 5% of equities is almost a waste of time for anything...

3. The risk is off the charts...


I agree with Eric on this one. Such a fund certainly offers the potential for big payoffs, but that's far different from saying that this is likely to occur.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby pauliec84 » Sun Apr 14, 2013 4:10 pm

For what its worth, over the meager 6th months of its existance, the fund returns have only trailed the index's returns by 0.23%
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Sun Apr 14, 2013 4:22 pm

I'm not as advanced of an investor as many on here. I listen to the experts and follow boglehead philosophy pretty closely. As far as this FM fund is concerned, my gut tells me go ahead and buy a little. Maybe 1% of portfolio. Maybe less. But why not gain a little exposure to these other countries and markets? Maybe hit a home run. Maybe lag behind VXUS or VSS. WHo knows?

I know that what I said above is not an academic argument to buy it, but anybody else get what I'm sayin? Catch my drift? Feel my vibe? :happy

Edit: just got paged back to the hospital. Ugh. :D
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby stlutz » Sun Apr 14, 2013 4:44 pm

If you want a possible home run for 1% of your portfolio, find an individual US microcap stock you like and buy that. You need to be more concentrated if you want the kind of home run where 1% of your portfolio will matter.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Sun Apr 14, 2013 4:51 pm

stlutz wrote:If you want a possible home run for 1% of your portfolio, find an individual US microcap stock you like and buy that. You need to be more concentrated if you want the kind of home run where 1% of your portfolio will matter.


thanks for your response. i mean that sincerely. but i never understand when folks on here say this or that wont "matter." i understand that putting 1% of portfolio into FM will not make anybody a millionaire. i get that. but i dont think it has a much greater chance of going belly-up (or any much more significant chance of going belly up compared to VWO or VSS, correct me if i am wrong :happy ). but what i meant by home-run is that 1% in FM maybe adds a little diversification and/or maybe ends up returning a higher percentage than VXUS, VSS, VWO etc. i think every little bit matters. no? maybe it does worse than VXUS, VWO, VSS, who knows?

again, no expert here. :D just thinkin', ponderin', doin the best i can........
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby pauliec84 » Sun Apr 14, 2013 4:52 pm

I agree with you that there is a fun aspect to holding this fund.

I also think there is a obvious diversification benefit aspect to holding this fund, and it is always nice when there is an asset has the potential to increase both your Return, and simultanously lower your portfolio risk (sort of like going from 100% bonds to 80% Bonds/20% Stocks).

But....

1) We shouldn't hold assets because they are fund. I feel victim to this with the bridgeway microcap fund, but you could lead this argument along to the point where you are investing in penny stocks etc.

2) As the argument thus far illustrates, it is unclear if the diversification benefit of this asset class outweigs the uncertainty that you would take investing in it. You are essentially jumping off a cliff as to what this fund has to offer in terms of the premium you have to pay to enter it, and how trading costs and qualified dividends will drag down its returns.

For those interested, the MSCI index returns for frontier markets are avaiable on the MSCI website going back to 2007 for the FM 100, and 2001 for their FM index. I played around with these a bit, but didn't see anyhting interesting to report. Risk was nto that much higher than developed markets over the same perirods, and the global fama french factors do not explain the returns of the FM at all.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Sun Apr 14, 2013 5:09 pm

For what it's worth, I used to own a frontier markets CEF (just for fun, not a significant holding). I bought it in mid to late 2009, when it was trading for 10% less than its NAV.

It had a decent country mix, but a very high expense ratio. However, a 10% discount covered several years of E/R. I had a modest gain in it, but the volatility was actually quite disappointing, if you were expecting a high likelihood of either striking it rich or losing almost all of your investment. RZV actually had much higher volatility.

Eventually the sponsor decided to convert the fund to an open-end structure (with a load, IIRC). This caused the price to instantly increase to the NAV, after having the very consistent 10% discount at which I had purchased it. Since I had no interest in owning a fund with a load, I sold it.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby patrick » Sun Apr 14, 2013 5:14 pm

If you want to invest in these at market weight the percentage should be very small indeed. From the data World Bank data at http://data.worldbank.org/indicator/CM.MKT.LCAP.CD/countries/1W?display=default these countries seem to add up to much less than 2% of world market cap -- and you would have to go even lower if you wanted to use the float adjusted market cap.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby nisiprius » Sun Apr 14, 2013 8:16 pm

The phrase "Frontier markets" is a great piece of euphemistic marketing. (Makes me think of Disneyland, Davy Crockett, and the winning of the West, how about you?)

If the neutral, objective term for "Emerging markets" is "less economically developed countries," what would be the neutral, objective term for "frontier markets?"
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby baw703916 » Sun Apr 14, 2013 8:47 pm

nisiprius wrote:The phrase "Frontier markets" is a great piece of euphemistic marketing. (Makes me think of Disneyland, Davy Crockett, and the winning of the West, how about you?)

If the neutral, objective term for "Emerging markets" is "less economically developed countries," what would be the neutral, objective term for "frontier markets?"


Actually, many of them are like the old west (not the Disneyland version). Raw materials a major part of the economy, high levels of violence and corruption in a number of cases, often conflicts between different ethnic and religious groups.

If all of these issues are already adequately priced in, and then start to improve, your investments may do well.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby patrick » Sun Apr 14, 2013 9:02 pm

nisiprius wrote:The phrase "Frontier markets" is a great piece of euphemistic marketing. (Makes me think of Disneyland, Davy Crockett, and the winning of the West, how about you?)

If the neutral, objective term for "Emerging markets" is "less economically developed countries," what would be the neutral, objective term for "frontier markets?"


Note however that the frontier market label is based mainly on development of the stock market, not on the country as a whole. Many of the countries on the list are quite wealthy. 16% of the fund is invested in Qatar which is, depending on the source used, either the wealthiest or the second wealthiest country in the whole world!
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby pauliec84 » Sun Apr 14, 2013 9:06 pm

Does it really matter what the countries are like?

There is the story-time approach that accomplishes nothing.

There is the efficient market approach that says the market knows all of these things and it will be incorporated into the price.
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Re: iShares MSCI Frontier 100 (FM) [ER 0.79%]

Postby xram » Fri Apr 26, 2013 7:38 am

Thanks for all the replies.
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