Frontier markets need to be treated cautiously by investors, a US regulatory body has warned.
In an investor note published on the Financial Industry Regulatory Authority’s website, called, Frontier Funds – Travel With Care, it suggested investors pay closer attention to the various risk factors affecting countries with emerging economies.
It warned: “Monitor changes in index components. If you are investing in a frontier exchange-traded fund or index mutual fund, make sure you understand the index the fund tracks and the components of that index. The countries included in a frontier index can change over time.”
| Things to consider: |
Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds. |
Consider Performance History. Frontier funds are relatively new, and most have limited performance histories. |
Finra also said investors need to be aware that some frontier markets are located in parts of the world with unstable political or market environments.
Gerri Walsh, senior vice-president for investor education at Finra, said: “Before investing in a frontier fund, investors should consider whether and how such an investment might fit as part of a well-diversified portfolio.”
Frontier funds generally invest in countries such as Argentina, Lebanon, Nigeria, Slovenia and Vietnam.
Industry view
Richard Troue, head of investment analysis at Bristol-based Hargreaves Lansdown, said: “Broadly speaking, the guidance is sound and I reiterate those points to investors.
“With high risk often comes the potential for greater reward though. Some frontier markets have excellent long-term growth potential and there can be a place in a diversified portfolio for such investments if one has a long-term horizon and is willing to tolerate the inevitable volatility.”
