What Is The Difference Between A Developed, Emerging, and Frontier Market? (EWI, EWZ, RSX, EPI, FXI, EWP)
Sean Geary: For amateur investors, discerning what exactly differentiates developed, emerging, and frontier markets can be challenging. Today, we’ll try to clarify some of these important distinctions for people looking to invest overseas.
Developed markets are probably the easiest to identify. As the phrase itself implies, these countries are usually the most advanced economically. As well, they have highly developed capital markets with high levels of liquidity, meaningful regulatory bodies, large market capitalization, and high levels of per capita income. Developed markets are found mostly in North America, Western Europe, and Australasia, including nations like the U.S., Canada, Germany, the U.K., Australia, New Zealand and Japan.
Different entities have different definitions as to what constitutes a developed market, which can make the issue somewhat confusing. As a result, a given country can be a developed market according to one firm and an emerging market according to another. For example, South Korea is a developed market according to FTSE, but an emerging market according to MSCI as of 2010.
Defining emerging markets and frontier markets gets a little trickier. An emerging market is, in short, a country in the process of rapid growth and development with lower per capita incomes and less mature capital markets than developed countries. It includes the famed BRICs, Brazil (NYSEARCA:EWZ), Russia (NYSEARCA:RSX), India (NYSEARCA:EPI), and China (NYSEARCA:FXI); and even the PIIGS (Portugal, Ireland, Italy (NYSEARCA:EWI), Greece (NYSEARCA:GREK), Spain (NYSEARCA:EWP)– also known by the more politically correct moniker GIPSI).
A frontier market is a subset of the emerging market category. In other words, frontier markets are emerging markets, but not all emerging markets are frontier markets. Specifically, a frontier market is one with little market liquidity, marginally developed capital markets, and lower per capita incomes vis à vis the more developed emerging markets like Brazil and China. However, because frontier markets have yet to undergo much meaningful economic development, the potential for rapid growth and outsized returns make these markets interesting to high-risk investors.
Frontier markets include the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey,and South Africa) and places like Nigeria, Bangladesh, and Botswana. Like with the distinction between developed and emerging markets, the difference between a traditional emerging market and a frontier market can differ based on the entity making the distinction. For example, Colombia is considered just an emerging market by some, and a frontier market by others.
While, in general, developed markets are considered safer than emerging markets, and the more developed emerging markets safer than frontier markets, this is not a rule that can be applied unequivocally. When Singapore, Taiwan, and South Korea are called emerging markets by some entities, and Greece and Portugal are categorized as developed markets, it’s apparent that developed markets are not always safer than emerging ones.
When investing in foreign markets, it’s important to bear in mind the differences between developed, emerging, and frontier markets in order to better understand the risk, liquidity, and growth potential of a given country.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.