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Nicholas Vardy, editor of Global Stock Investor, says “frontier” markets offer more diversification and more potential growth than the BRICs, and he recommends an ETF that captures that.

The Claymore/BNY Mellon Frontier Markets ETF (NYSEArca: FRN) replicates an equity index called The Bank of New York Mellon New Frontier DR Index.

Although they don’t get the press that the big BRIC economies—Brazil, Russia, India, and China—do, frontier markets actually may offer superior investment opportunities, [offering] high, long-term returns and low correlations with other markets. When developed markets zig, frontier markets are more likely to zag. And over time, successful frontier markets will graduate into more liquid developed emerging markets.

The top four country holdings in FRN, as of March 31st, are Chile, Colombia, Egypt, and Poland, which account for just under two-thirds of the fund’s holdings. As it happens, both Chile and Colombia are among the top-performing stock markets in the world this year.

Chile is arguably the most economically successful and certainly, on a per capita basis, the wealthiest country in Latin America. Chile’s growth in real gross domestic product (GDP) averaged 8% during 1991-1997, rivaling that of the Asian Tigers, [and] 5%-7% for most of the past decade—outstripping growth rates in neighboring Brazil.

Chile has been the third best performing market in the world for each of the last ten years and is a top performer so far in 2010, up 5.7%.

Egypt’s GDP of $452.5 billion in 2008 makes its economy roughly half the size of Turkey. Politically, Egypt is a linchpin in US-Middle Eastern politics. Economically, Egypt has benefited tremendously from huge amounts of US foreign aid, trade, and investment since the [1978] Camp David accords.

Even if indirectly, US influence has pushed Egypt towards free-market economic reforms. The result? Per capita GDP more than tripled from $1,355 in 1981 to an estimated $4,535 in 2006. [Egypt’s] weighting in FRN will allow you to take advantage of the next boom in Arabic markets.

Colombia never will have the economic heft of larger rivals like Brazil and Mexico. That does not make its economic achievements less impressive. After battling double-digit inflation and 20% unemployment in the last decade, Colombia introduced economic reforms that have shrunk its national debt and kick-started its economic growth.

By the end of this year, Colombia’s net debt still will equal only about 38% of GDP. That’s less than half the level [at which] the United States and the United Kingdom will stand by the end of 2010. The Colombian market is up 21.4% this year—outperforming even BRIC star Brazil.

Poland has made remarkable progress in the 20 years since the collapse of the Berlin Wall. Impressively, Poland, [which is not part of the euro zone], was the only economy in the European Union that grew in 2009.

The OECD recently upped its forecast for Poland’s GDP, now predicting it to grow by 3.1% in 2010 and 3.9% in 2011.

Taking a page from Chile’s success, Polish citizens also are required to make contributions of 3.5% of their annual salary to private pension fund providers that put the majority of the money into domestic assets. This helps support the local stock market.

So, buy FRN at market today, and place your stop at $16.50. (It closed below $20 Wednesday—Editor.)

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