Index provider FTSE has recently excluded Argentina from its frontier equity Index while downgrading Morocco from emerging to frontier market status. The changes are part of FTSE’s annual country classification review and will be effective from next June.
Argentina has stringent capital control, which is believed to be the primary reason for FTSE demoting the country to “unclassified market status,” as per a Reuters report. The restrictions are believed to have been imposed by the country’s President Cristina Fernandez in 2011.
In July, Argentina had defaulted on a sovereign bond payment, the second such default in 13 years and the third in 25 years. This was the result of the decade-long legal battle between Elliot Management and the Argentine government. Argentina defaulted on an interest payment of $539 million. The default has raised fears over the instability of the country (read: Argentina ETF Tumbles on Default).
Separately, the index provider has added both Latvia and Palestine to its watch list for a possible inclusion to its Frontier markets index, while Mongolia and Kazakhstan are already under consideration for a possible inclusion.
However, rival index provider – MSCI – still classifies Argentina and Morocco as frontier markets (read: Frontier Market ETF Leading Emerging Market Rally ).
The recent changes in index constituents by FTSE might as well prompt other index providers to reconsider the weightage given to individual countries in their frontier market indexes. As such, investors should closely monitor the following frontier market ETFs, which might see some changes ahead (though none of the ETFs discussed below has FTSE as its index provider).
iShares MSCI Frontier 100 ETF ( FM )
FM tracks the MSCI Frontier Markets 100 Index to provide exposure to frontier market equities. The fund presently holds 128 stocks with National Bank of Kuwait, Kuwait Finance House and Zain Mobile Telecommunication as the top three holdings.
Argentina is among the top three countries in the fund with 8.5% allocation, while Kuwait occupies the top spot with 22.8% allocation. Morocco has roughly 3.8% allocation in the fund. The fund weighs heavily on the Financial sector with more than half of the fund allocation, followed by Telecom and Energy with double-digit allocation.
FM is the most popular product in the space with an asset base of $810.7 million and an average trading volume of 290,000 shares. The fund charges 79 basis points as fees and has returned 15.5% this year.
Global X Next Emerging & Frontier ETF ( EMFM )
The fund tracks the Solactive Next Emerging & Frontier Index to provide exposure to a well-diversified basket of 210 stocks (read: Invest in Surging Frontier Market ETFs ).
Malaysia, South Africa and Mexico occupy the top three spots with roughly 10% allocation each. Frontier market Argentina has roughly 3.7% allocation in the fund. Financials takes the top spot with 21% allocation, followed by Materials and Telecom with 16.9% and 13.1% allocation respectively.
EMFM is less popular in the space with an asset base of $157.7 million and an average trading volume of 15,000 shares a day. The fund charges 58 basis points as fees and has returned 6% in the year-to-date frame.
Guggenheim Frontier Markets ETF ( FRN )
The fund is the least popular in the space with an AUM of under $100 million. The fund tracks the Bank of New York Mellon New Frontier DR Index to provide exposure to 38 stocks.
Financials dominates here too with 38% allocation, while Energy, Integrated Oil & Gas and Utilities also have double-digit exposure. Country-wise, Chile, Colombia and Argentina occupy the top three spots with a combined allocation of roughly 70%.
FRN charges 70 basis points as fees and has returned 3.4% in the year-to-date frame.
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