No Need to Fear the Frontier Funds

Emerging markets are attracting investors' attention as rapid growth offers new investment opportunities.

Investors looking for exposure to Brazil, Russia, India and China have flocked to ETFs like the iShares MSCI BRIC Index (NYSE:BKF).  The four countries make up more than two-fifths of the world’s population and are expected to be major players in the future of the global economy.

However, there are other options for investors looking to gain exposure to emerging markets outside of the BRIC countries, and frontier markets that were once viewed as extremely risky are now attracting interest.

Twenty years down the road from now, some of the world’s top economies may include regions that aren’t at the top of today’s investment lists. As economies expand, the amount of disposable income rises, and frontier markets like Chile, Cambodia and Vietnam could be the perfect place to park your investments for future growth.

So how do you tap into these frontier markets?

The Guggenheim Frontier Markets ETF (NYSE:FRN) gives investors access to countries like Colombia, Kazakhstan and Chile.   Another option is the PowerShares MENA Frontier Countries ETF (NYSE:PMNA), a broader play on frontier markets.  The fund’s largest holdings are North Africa and the Middle East and aims to mirror the performance of the NASDAQ QMX Middle East North Africa index.

But while these markets are experiencing growth, the exchange-traded funds listed above ignore some of this year’s top performers, such as Vietnam.

Market Vectors Vietnam ETF (NYSE:VNM) is soaring so far this year, up more than 41% and fueling the argument that Vietnam is this year’s most investable frontier market.   The ETF faced severe weakness in 2011, among the worst performers in the emerging market world as the country faced significant inflation.  The ETF holds 31 stocks, total assets of $342 million and tracks the performance of its underlying Market Vectors Vietnam index.

Following a volatile year, Vietnam looks to have gotten its growth under control, cutting its refinance rates for the first time in three years.  The World Bank recently estimated Vietnam’s GDP to rise to 6.1% in 2012, boosting investor’s confidence in the explosive market.

But while frontier markets offer opportunity, investors need to proceed with caution.  Frontier markets are smaller, less liquid and less developed than emerging markets and therefore typically considered a speculative holding.