Frontier market ETFs get more specific

It is putting it mildly to say the ETF space is getting more robust every day. The most recent iShares Exchange Traded Funds Performance Report is 20 pages long and contains I don’t know how many ETFs.

Image courtesy of Individuo: http://www.everystockphoto.com/photographer.php?photographer_id=18122

The Andes tower over Santiago, Chile

This is news both good and bad. Good because it is demonstrative of the expanding ETF universe; bad because for the non-professional it presents a daunting if not overwhelming amount of material to filter through.

The emerging market ETF menu is expanding as well, right down to the proliferation of frontier market ETFs. Leveraged, inverse, and x-times leveraged ETFs also abound. I have used leveraged ETFs but don’t generally recommend them to individual investors. I do however look forward to utilizing the increasing number of region- and country-specific ETFs.

It is easy and common to lump everything together when talking about emerging and frontier markets. I don’t think it bad per se to simply buy an all encompassing ETF like the iShares MSCI Emerging Markets Index ETF (EEM, quote). I do think it a mistake to not consider the component countries and disparate regions.

For example, if we separate the BRIC nations we can see different rates of growth and different performance between their respective country specific ETFs. The chart below shows how performance can be correlated but results different; in this case PowerShares India Portfolio (PIN, quote) and iShares FTSE/Xinhua China 25 Index (FXI, quote).

For the astute investor the cluster of new ETFs allow us to study regions, individual countries, and even economic organizations and in effect create our own index based upon our analysis and expectations for growth. A good example is the iShares MSCI Philippines Investable Market Index Fund (EPHE, quote).

If your analysis leads you to conclude the Philippines will be a standout in coming years, you can use this ETF to focus exposure. Why buy a fund that invests in all of Asia, merely to miss the rewards of the Philippines while it’s buried by overconcentration in other countries?

This of course requires astute knowledge of the outlook for the Philippines, but clearly the people at iShares have done their homework and recognize a market for the fund.

Two other interesting and relatively new funds are the Global X FTSE ASEAN 40 ETF (ASEA, quote) and The Global X FTSE Andean 40 ETF (AND, quote).

ASEA seeks investment results that correspond to the price and yield performance of the stock markets of the member countries of the Association of Southeast Asian Nations. Formed on August 8, 1967 the Association of Southeast Asian Nations is a geo-political and economic organization of ten countries located in Southeast Asia. The original membership included Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then additional countries have joined including Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. This presents an interesting opportunity to diversify among a region but also discriminate about which countries you are gaining exposure to.

The Global X FTSE Andean 40 ETF seeks investment results generally corresponding to the price and yield performance of the FTSE Andean 40 Index, which tracks the performance of the 40 largest companies in Chile, Colombia, and Peru. This fund presents another opportunity to diversify within a region but discriminate to a more specific degree which countries, and companies, to which you gain exposure.

All three funds provide a distinct opportunity for the more discriminating investor. As we move into the future it’s clear not all regions, nor countries within those regions, will succeed equally. Funds like those listed above enable us to focus investment dollars in the areas we believe will be most beneficial. 

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