Look Towards the Investing Frontier

Focus: ETFS

Nicholas Vardy Image Nicholas Vardy Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

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.