Frontier market stocks

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In 1992, Farida Khambata, an official at the International Finance Corporation, coined the term frontier markets for nations with smaller market capitalization and less liquidity than nations classified as emerging markets. [1] Frontier markets make up approximately 6% of world GDP and comprise 1% of world stock market capitalization. [2]

Frontier market stocks

Fig. 1. Global equity markets

According to FTSE, the world consists of approximately 150 nations possessing stock exchanges. FTSE classifies 48 of these nations as either developed markets or emerging markets. The remaining countries are candidates for frontier market classification. [3]

The majority of countries now included in frontier market indexes come from the following constituents:

  • Former soviet and marxist economies establishing private markets and stock markets. These countries include many small states in Eastern Europe and in Central Asia. Viet Nam would also be included in this group.
  • Middle Eastern, Arabian peninsula, and North African states establishing and opening stock markets to international investment.

Over time, national markets can migrate from the continuum of classifications, moving between developed, emerging, and frontier markets. Index providers normally have countries on a watch list for future inclusion or exclusion into or out of a frontier market index. [note 1] For example, MSCI has shifted Sri Lanka (2001), Venezuela (2006), Jordan (2009), Pakistan (2009), and Argentina (2009) from emerging market classification to frontier market classification over the past decade. [4]

Figure 1. provides a map showing the worldwide distribution of frontier, emerging, and developed stock markets.

Risk, volatility, correlation


Frontier market stocks encompass all the risks affecting emerging stock markets. In the case of frontier markets, these risks are magnified. In addition to market and currency risks, frontier markets are especially susceptible to the following risks:

  • Political risks. Political instability can result from external conflict, coups, and racial and national tensions.
  • Economic risks. Economic policies and reforms can fail.
  • Regulatory and operational environment. The quality of market regulation, corporate governance, transparency, and accounting standards is often below that of developed markets.
  • Limits on investment. Foreign investment may be limited or taxed.
  • High industry/firm concentration. In frontier markets, a large share of a country’s stock market capitalization may be concentrated in a particular industry or company. [5]


The volatility of frontier market stock returns, as measured by standard deviation, has generally been greater than the broader global market. Much of this increased volatility occurred during the 2008-2009 financial crisis. Prior to the crisis, frontier market stock returns exhibited lower volatility relative to U.S. and international market returns, and relative volatility has declined over the last three years. Over the span of measured returns (starting date 2003), the MSCI Frontier Market Index returns have ranged from +72.68% in 2005 to -54.15% in 2008. [note 2] MSCI reports standard deviation of monthly returns for the MSCI Frontier Market Index compared to the MSCI ACWI (All Country World Index) + Frontier Markets Index in the table below:

Standard Deviation (2003-2012) [6]
Index 10-year Standard Deviation 3-year Standard Deviation
MSCI Frontier Market Index 21.09 13.94
MSCI ACWI + Frontier Markets Index 16.87 17.45


Fig.2. Frontier Market Correlation. Rolling 52 week correlations.Source: Bloomberg

The correlation of frontier market returns to emerging market stock returns and developed market stock returns has been low, especially during the period preceding the 2008 financial crisis. Since the crisis period, correlations have risen. Historically, the correlation between individual frontier markets has been low, resulting in lower overall volatility from a diversified portfolio of frontier markets as opposed to an investment in a single country. This suggests that a prudent strategy would be to invest in a broad-based frontier market index.

Correlation [7]
Index Time Period Frontier/Emerging Frontier/Developed Emerging/Developed
Frontier market 1997-2008 0.48 0.50 0.82
Frontier market 2008-2011 0.76 0.78 0.90

Transaction costs

Frontier market stocks are less liquid and more thinly traded than developed market stocks. Transaction costs are higher than in the U.S. markets. Marshall, Nguyen, and Visaltanachoti (2011) measure frontier market spread and market impact costs and find value weighted spread costs averaging 1.86% and market impact costs averaging 0.93%. The table below provides comparative value weighted spread costs.

Transaction costs (2002-2010) [8]
Frontier Emerging US
Minimum 1.18 1.19 0.43
Mean 1.86 1.90 0.72
Median 1.59 1.66 0.59
Maximum 6.54 3.77 2.15
Std. Dev. 0.91 0.56 0.30

Cross section of stock returns in frontier markets

In a 2012 paper, De Groot, Pang, and Swinkels [7] investigate the cross section of frontier market stock returns using a unique survivorship-bias free data set consisting of more than 1,400 stocks over the period 1997 to 2008, covering 24 of the most liquid frontier emerging markets. De Groot, Pang, and Swinkels found the presence of economically and statistically significant value and momentum effects, and a local size effect. They also found that the value and momentum effects continued to exist when incorporating conservative assumptions of transaction costs (2.50%). In addition, the research found that value, momentum, and local size returns in frontier markets could not be explained by global risk factors. De Groot, Pang, and Swinkels found returns, after incorporating transactions costs, of 6.6% to 7.7% per annum for value strategies and net of expense returns of 4.6% to 7.2% for momentum strategies.

Frontier market indexes

Dow Jones, FTSE, MSCI, Russell, and S&P provide indexes of frontier market stocks. These indexes were introduced in 2007/2008. [note 3] In addition to broad market indexes, most providers supply regional indexes that cover the pan-Africa region; the Americas; Europe and Central Asia; the GCC (Gulf Cooperation Council) [note 4] and Arabian peninsula; and the Asian markets. Given the heavy weighting of GCC countries in the broad frontier market indexes, providers also issue frontier market ex-GCC indexes.

In 2011/2012 index providers began creating indexes designed for easier investment. Examples include indexes such as the FTSE Frontier 50; the MSCI Frontier 100; the S&P Select Frontier 40 and S&P Extended Frontier 150 indexes. [note 5]

IShares launched the first index fund to track a geographically broad, focused frontier markets index (MSCI Frontier Markets 100 Index) in September, 2012.

The table below lists the constituent national stock markets included in each provider's broad market index. Each provider defines the universe of emerging markets and frontier markets differently, so countries appearing in one provider's emerging market index can often appear in another provider's frontier market index. When investor asset allocations include both emerging market and frontier market asset classes, it is advisable to use the same provider's emerging market and frontier market indexes, thus avoiding unintended duplication of country holdings.

Country Representation (2012)
Country Dow Jones[9] FTSE[10] MSCI[11] Russell[12] S&P[13]
Côte d'Ivoire
Papua New Guinea
Sri Lanka
Trinidad and Tobago
United Arab Emirates

Frontier market index funds

A limited number of frontier market index funds [note 6] are currently available to U.S. investors as ETFs. These funds include: [note 7]

  • The Guggenheim Frontier Markets ETF: "The fund invests at least 80% of its total assets in American depositary receipts ("ADRs") and global depositary receipts ("GDRs") that comprise the Bank of New York Mellon New Frontier DR Index or in the stocks underlying such ADRs and GDRs." The fund has a 60% weighting in three countries included in most index provider's emerging market index: Columbia, Chile, and Eqypt. Thus, the fund holds a minority position in frontier market stocks.
  • The Powershares Middle East North Africa Frontier Countries Portfolio: " The fund invests 90% of its total assets in securities that comprise the NASDAQ OMX Middle East North Africa Index, and American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) based on the securities in the Index. The Index seeks to provide direct exposure to liquid stocks of companies that have the majority of their assets or services residing in MENA frontier market countries, which include Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates." Thus the fund is essentially a middle eastern regional fund.
  • The ishares MSCI Frontier 100 Index Fund: "The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Frontier Markets 100 Index." The fund exclusively tracks frontier market stocks. The fund, consistent with its underlying index, has a 50% to 60% weighting to Gulf Cooperation Council countries, and a high 50% to 60% weighting in financial stocks.
Frontier market ETFs (2012)
ETF Ticker Website Morningstar ER Tracking Index
Guggenheim Frontier Markets ETF FRN link FRN 0.65% Bank of New York Mellon New Frontier DR Index
Powershares Middle East North Africa Frontier Countries Portfolio PMNA link PMNA 0.70% NASDAQ OMX Middle East North Africa Index
iShares MSCI Frontier 100 Index Fund FM link FM 0.79% MSCI Frontier Markets 100 Index

Suggested asset allocations

Frontier markets occupy 10% to 15% of the total emerging market stock universe. An approximate total market-weighted allocation would hold:

Asset Class Asset Allocation
Emerging Market 85% -90%
Frontier Market 10% -15%


  1. Index provider watch lists:
  2. The following table provides frontier market index returns.

    (view Google Spreadsheet in browser or download as xls, ods, or pdf)
  3. The S&P BMI Frontier Market Index, introduced in 2008, has data backdated to 1995, based on individual country data.
  4. The GCC countries include Bahrain , Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates
  5. The broader frontier market indexes include more stocks than those designed to be investable. According to 2012 fact sheets available from provider websites, The S&P BMI index includes 556 stocks. The MSCI Frontier Market index, covering 85% of the market, includes 148 stocks. In 2011 MSCI introduced the MSCI Frontier Markets Investable Market Index (IMI), covering 99% of the market, and including 378 stocks.
  6. In 2011, Global X filed with the SEC for broad-based, regional, and individual country frontier market ETFs based on FTSE indexes. Global X Announces Plans For A Slew of International ETFS,
  7. provides a listing of frontier market ETFs at List of Frontier Market ETFs


  1. Frontier markets, wikipedia , Retrieved 28 November 2012.
  2. The Final Frontier, Blackrock
  3. What are Frontier Markets?, Journal of Indexes, Sept/Oct 2008.
  4. Speidell, Lawrence, CFA Frontier Market Equity Investing: Finding the Winners of the Future", Research Foundation Publications, May 2011, Vol. 2011, No. 2, CFA Institute Publications p.3. On-line pdf. publication.
  5. International equity investing: Investing in emerging markets, Vanguard, 04/02/2006
  6. MSCI Frontier Market Factsheet, Retrieved 27 November 2012.
  7. 7.0 7.1 De Groot, Wilma, Pang, Juan and Swinkels, Laurens A. P., The Cross-Section of Stock Returns in Frontier Emerging Markets (August 1, 2012). Journal of Empirical Finance, Vol. 19, Issue 5, pp. 796-818.
  8. Marshall, Ben R., Nguyen, Nhut H. and Visaltanachoti, Nuttawat, Frontier Market Transaction Costs and Diversification (October 11, 2011).
  9. Dow Jones Global Equity Handbook, Retrieved 28 November 2012.
  10. FTSE 50 Index, Retrieved 28 November 2012.
  11. MSCI Methodology (2012), Retrieved 28 November 2012.
  12. Russell Frontier Indexes, link to Russell Index Country Guidebook, Retrieved 28 November 2012.
  13. S&P Frontier BMI Factsheet, Retrieved 28 November 2012.

External links

Index providers

Further reading