Growth and Income from the New Frontier

Much of the attention lately has been focused on US stock indexes as they reach for new highs. Sidelined investors have been piling into the domestic market, creating record equity fund inflows, while perma-bears have been predicting an imminent market peak and subsequent crash.

But one topic that seems to have fallen out of favor a bit is emerging markets. 

There is still some coverage of emerging markets, mostly suggesting that the best growth rates for a couple of the BRIC (Brazil, Russia, India and China) countries are in the past. But it is shortsighted to think of “BRIC” as synonymous with “emerging market”.

They are not synonymous terms. There are plenty of other emerging economies—many that don’t start with the initial B, R, I or C—that are rife with opportunity.

The S&P is up 8 percent year to date, and it may go higher. But some of these other emerging markets, the “Frontier Markets”, are doing as well or better and they should not be overlooked.

Let’s consider a few exchange-traded funds (ETFs) that offer a way to gain exposure to the new frontier while positioning our portfolios for both growth and income.

The Middle East: The Heat Is On

A great benefit of the growth of the ETF market the past few years is the variety of funds that invest in specific regions and countries. 

One of the hotter regions today is the Gulf States. And a fine ETF with which to gain exposure to countries like the United Arab Emirates, Qatar and Kuwait (which together account for 95 percent of this fund’s allocation) is the WisdomTree Middle East Dividend Fund (GULF). This ETF has kept pace with the S&P 500 so far in 2013 and it’s up 8 percent.

GULF tracks WisdomTree’s own Middle East Dividend Index. The fund is therefore guided by the company’s philosophical focus on dividend investing. 

And the resulting yield is significantly greater than that of the S&P 500 and the funds that track that index. For example, the SPDR S&P 500 Index Fund (NYSE: SPY) is yielding 2.06 percent; GULF has a current yield of 6.19 percent.

Another fund that focuses on the Middle East, the Market Vectors Gulf States ETF (NYSE: MES), has a yield of only 2.73 percent. However it is outperforming GULF with a year to date return of 9.1 percent.

Both GULF and MES are appealing but I must point out that they are not very liquid.  The two funds have average daily trading volumes of less than 10,000 shares. 

This means they trade with much wider spreads than do other, more liquid funds. Low volume and wide spreads means you have to earn more (cover the spread) to breakeven and it may make it tricky to liquidate a position, especially if circumstances sour.

Asia On Fire

Several countries not named China have been providing investors with returns to write home about.

Vietnam is one of those countries. There is only one ETF that focuses on Vietnam and that is the Market Vectors Vietnam ETF (VNM), which is up 20 percent year to date.

VNM is currently yielding 1.74 percent, not particularly high but with its recent performance I don’t think shareholders are concerned.

The fund is well diversified with 31 positions spread across eight sectors, the bulk of which is in financials (42.3 percent), energy (21.9 percent) and industrials (12.1 percent). 

Thailand, Vietnam’s neighbor to the west, also has its own ETF: the iShares MSCI Thailand Investable Market Index Fund (NYSE: THD), one of the top performing emerging market ETFs for several years. As of 12/31/2012, the fund has a three-year average return of 27.22 percent. 

And it has kicked off 2013 with a continuation of that performance, with a 9 percent year to date return. THD has a low dividend yield of 0.94 percent, but as with VNM, shareholders haven’t noticed. 

This fund has more than 90 holdings with concentration in three sectors: financials (40.37 percent,) energy (17.88 percent) and materials (10.55 percent).

And Thailand is a country that’s still growing. Estimates are that its government has plans to spend upwards of $70 billion on infrastructure. That could be a boon for many of the companies the fund owns, driving the ETF even higher.

Due south of both Vietnam and Thailand is Singapore. One of Singapore’s namesake ETFs is showing evidence that growth is alive there as well.

The iShares MSCI Singapore ETF (NYSE: EWS) was up 30 percent in 2012, and although it has slowed down a bit so far in 2013, this is another country that should stay on your radar.

EWS is a great way to gain exposure there, for even if the ETF’s performance stays sluggish, shareholders will be cashing in with its dividend. EWS has a current yield of 5.04 percent. 

EWS has 32 holdings but 64.14 percent is concentrated in 10 stocks. The sector allocation is as follows: Financials (49.08 percent), Industrials (24.30 percent), Telecommunications (11.90 percent), Consumer Discretionary (9.02 percent), Consumer Staples (5.29 percent), Other (0.26 percent) and Short Term Securities (0.15 percent).  

What did you think of this article? Please post your comments below!

Steven Orlowski is a 20-year veteran of the investment business. He has worked for some of the most prestigious firms in the world in a variety of capacities, including portfolio manager, trader and high net worth financial planner.

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