In some cases, fund managers are looking to fold in some frontier exposure in their emerging- and even developed market-focused funds.
T. Rowe's Emerging Europe Fund, for instance, includes companies in Ukraine and Kazakhstan, which are both considered frontier markets. In Kazakhstan, which is rich in natural resources, the Emerging Europe Fund holds shares of copper producer Kazakhmys. As Ukraine's economy remains highly dependent on demand for its steel and agricultural products, the fund owns a U.K.-listed iron ore producer Ferrexpo for its exposure.
The risks. The greatest risk in these still-volatile markets tends to lie with low foreign ownership of stocks and bonds, which can equate to thinly traded and illiquid conditions. What's more, corruption persists, market regulation can lag, and geopolitical tensions can prove disruptive. And, as with any investment, valuation must be considered—some areas present better deals than others. Over the last decade, frontier markets outperformed emerging markets in a few years, but lagged emerging markets overall and were generally more volatile.
Cetera's Gendreau notes that among the handful of currently active frontier-market exchange-trade funds (ETFs), the bias leans heavily toward Middle East markets. That means commodity price fluctuation—oil in particular—will sway these equity returns. And oil, of course, is vulnerable to swings in political sentiment.
Still, it's never too early for research. Investors can start by tracking the MSCI Frontier Markets Indices, found at www.msci.com.