Johnston writes, “Don Dion, who covers ETFs for TheStreet.com and runs Dion Money Management, recently wrote a three part series highlighting the “10 Most Dangerous ETFs”. Dion notes that as the ETF industry continues to expand beyond “plain vanilla” funds, investors are introduced to products that can face significant liquidity issues, be subject to increased regulatory scrutiny, and carry “unprecedented risks” associated with their complex and non-traditional strategies. While I agree with most of Dion’s analysis (and certainly share his view that there are a number of complex ETFs that should be limited to the most sophisticated investors), I feel it’s necessary to defend a few of the ETFs that made the list.”
Here is one of the ETF’s Johnston defends and writes about: Claymore/BNY Mellon Frontier Markets (FRN)
“FRN invests in frontier markets, which generally refer to the least developed economies in the world. MSCI Barra, a provider of domestic and international equity indexes, analyzes 75 markets around the world on four market accessibility criteria, including: (1) openness to foreign ownership, (2) ease of capital inflows/outflows, (3) efficiency of the operational framework, and (4) stability of the institutional framework. Based on their performance in these areas, each market is slotted into one of three categories: developed, emerging, or frontier,” Johnston Reports.
“Dion notes that frontier markets, which include Chile, Poland, Egypt, Colombia, and Kazakhstan, are “the most emerging of emerging markets” and are volatile both economically and politically. There’s no doubt that frontier markets are extremely risky. But they also offer tremendous reward potential. Frontier markets often offer potential for greater payouts due to the presence of numerous inefficiencies in asset pricing and flow of information. They can also see rapid expansion if market reforms and strengthened investor protection attract foreign investment,” Johnston Reports.
“Frontier markets are where emerging markets were, in some cases, 10 to 20 years ago,” says Antoine Van Agtmael, the chief investment officer of Emerging Markets Investors who is credited with inventing the term “emerging markets” in the 1980s in a Barron’s article earlier this year. Twenty years ago, China, Brazil, and India would likely have fit into this same category – facing extreme volatility and uncertainty and lacking clearly developed markets. I doubt that any investor who has maintained diversified exposure to these economies over the last two decades has been disappointed with the results. We looked at the volatility of FRN’s daily returns compared to SPY (which tracks the S&P 500) over the last 15 months, and found surprisingly little difference. Moreover, FRN is up nearly 50% in 2009, while SPY has gained only about 16%,” Johnston Reports.
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The investment (FRN) seeks to replicate, net of expenses, the Bank of New York Mellon New Frontier DR Index. The fund will invest at least 80% of assets in ADRs and GDRs that comprise the index. It is nondiversified.