NEW YORK (TheStreet) -- There's lots of talk about asset bubbles and oversaturation in emerging markets like Brazil, India and China, so investors looking to diversify their portfolios may want to investigate frontier markets instead.
According to the International Monetary Fund, 17 of the 20 fastest expanding economies fall into the frontier market category, which refers to developing markets at a much earlier stage of economic and financial development than emerging markets.
Examples include Qatar, Uzbekistan, Pakistan, Vietnam, Argentina, Chile, Ghana and Angola.
These markets are attractive partly because their lack of access to Western financial markets shielded them from the global credit crisis.
They also are developing rapidly, which generally translates into higher earnings potential for domestic companies and investors.
Frontier markets also offer investors the opportunity to diversify their portfolios, because these markets have growth dynamics that often do not correlate with the economies of developing nations.
Additionally, growth in China and India is likely to trickle down and have a domino effect in some these frontier nations. This trend is already starting to emerge as many of these countries are witnessing an expansion of their middle class, which is increasing spending power and consumer consumption.
Lastly, some observers suggest that some of these markets are undervalued because they are rich in natural resources and commodities while enjoying low labor costs. In fact, Ghana is the world's second largest cocoa producer, Angola is the largest crude oil producer in Africa, Qatar has an ample supply of crude oil and natural gas and Chile is known for its copper production.
Although there appears to be upside potential in frontier markets, it is equally important to consider the risks involved. These markets tend to be smaller than traditional emerging markets, which means less liquidity, making it difficult to exit a position quickly. They also often suffer from political corruption and poor infrastructure, which can impede sustained prosperity.
Investors looking to add exposure to these markets should consider the following exchange-traded funds.
Claymore/BNY Mellon Frontier Countries ETF
, which is the most diversified of the frontier funds. FRN allocates the majority of its assets to Chile, Egypt and Poland.
PowerShares MENA Frontier Countries ETF
, which is heavily concentrated in the Middle East. Nearly 60% of its assets are allocated to Egypt, the United Arab Emirates and Kuwait.
Market Vectors Africa ETF
, which concentrates on Africa with a significant portion its assets in South Africa.
WisdomTree Middle East Dividend
, which is focused on oil-rich nations like Qatar, the United Arab Emirates and Kuwait.
To help mitigate investment risks, it's important to construct an exit strategy with triggers at price points that represent abnormal weakness. Such a strategy can be found at
-- Written by Kevin Grewal in Laguna Niguel, Calif.
Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.