ETF of the week: Diversifying into frontier markets

Frontier markets, also known as nascent markets and emerging markets of the future, refer to a group of countries with an established financial market, but whose market capitalization and liquidity are still relatively low. The potential for growth - and therefore the associated risk - is greater than in developed markets, since the stage of economic development is at an early stage.

ETF selected: Xtrackers S&P Select Frontier Swap UCITS ETF 1C

What's in this ETF?

The ETF is synthetically replicated, which means that Xtrackers, the ETF provider, buys financial assets that may or may not be related to the underlying index tracked by the ETF. This is known as a substitute basket. Then, the provider enters into a swap contract with a third party - usually an investment bank - to exchange the performance of this substitute basket for that of the underlying index.

Therefore, by purchasing this ETF, you will be replicating the performance of the S&P Select Frontier index, which reflects the performance of the 40 largest frontier market companies. The top ten weightings represent 53.6% of the investment. These include South American e-commerce giant MercadoLibre (9.2%), airline Copa Holdings (9%), Argentinian energy companies YPF Sociedad (7.7%) and Pampa Energia (3.2%), Vietnamese steelmaker HOA Pharist HOA Phat, banking and financial groups Grupo Financiero Galicia (4.4%) and Freedom Holding (4.3%), McDonald's franchise company Arcos Dorados (4%), agribusiness Vietnam Dairy Products (3.5%) and Icelandic industrialist Marel (3%).

All in all, the majority of investment is directed towards Argentina (28.1%), Vietnam (26.4%), Panama (11.1%), Kazakhstan (8.5%) and Iceland (6.6%). Many of the companies in the index are listed in the USA, such as MercadoLibre, YPF, Grupo Financiero Galicia, Pampa Energía and others. This is a rather encouraging sign for information transparency.

In terms of currencies, the investor is mainly exposed to the dollar (53.9%), the dong (26.4%), the Vietnamese currency, and the Icelandic krona (6.6%).

The ETF is capitalisation-based, meaning that dividends are reinvested directly in the fund.

ETF performance since launch. The 2008/09 crisis hit only a few months later (source: Xtrackers).

What are its advantages?

• The ETF offers diversified exposure to high-potential markets.

More negative points

• Fees are fairly high (0.95%).
• Assets under management are low (under $100 million). This is not a negative point in itself, but it does mean that you need to keep an eye on the product's liquidity.
• Frontier markets are still underdeveloped economically speaking. As a result, investment should be considered over the long term and with caution. This ETF adds diversification to a portfolio.

ETF identity card :

Number of positions: 40

ISIN code: LU0328476410

Fees: 0.95%.