September 13, 2012 / 8:57 PM / 5 years ago

UPDATE 1-BlackRock launches "frontier market" fund with global reach

* New ETF costs 0.79 percent

* Analyst says this is the first “real global frontier ETF”

* Seeks to fend off low-cost rival Vanguard -experts

By Jessica Toonkel

NEW YORK, Sept 13 (Reuters) - BlackRock Inc has introduced an exchange-traded fund that invests in “frontier markets,” or small countries that do not qualify yet as emerging markets.

Similar funds already exist but BlackRock’s iShares MSCI Frontier 100 Index Fund may be the first to offer a truly global portfolio, according to one analyst.

The iShares fund invests in frontier market securities that are screened for liquidity and tracks the MSCI Frontier Markets 100 Index, according to a company statement issued on Thursday. Currently the index includes markets such as Croatia, Argentina, Nigeria, Vietnam and the United Arab Emirates.

There are only four other frontier markets ETFs available in the United States. The $17 million PowerShares MENA Frontier Countries ETF, the $13 million WisdomTree Middle East Dividend ETF and the $11 million Market Vectors Gulf States ETF, are limited to investing in the Middle East and Africa, according to IndexUniverse LLC.

The fourth ETF, the $142 million Guggenheim Frontier Markets ETF, has much broader exposure with some overlap into emerging markets. The vast majority of its exposure is Chile, Columbia and Peru, according to the firm. The fund tracks the BNY Mellon New Frontier DR Index.

“You aren’t getting a lot of frontier with your frontier fund with FRN,” said Dave Nadig, director of research at IndexUniverse.

With its new frontier markets ETF, iShares is providing investors with the ability to invest in the first “real global frontier ETF,” Nadig said.

This could be particularly attractive for investors who are looking to invest beyond emerging markets because as more emerging markets companies have begun expanding internationally, they have started to perform more like developed markets, he said.

BlackRock already has received interest in the fund from a number of registered investment advisers, model ETF portfolio providers and pension fund clients.

“We have a list of about 16-20 pension clients who are starting to invest one by one,” said Daniel Gamba, head of iShares Americas institutional business, in an interview.

For these clients, the fund complements their emerging markets exposure, Gamba said.

Also, these investors recognize the growth potential in these smaller frontier markets, he said.

“We believe that emerging markets will outperform ex-U.S. developed markets by 2 to 4 percent over the next five years,” Gamba said.

The launch of BlackRock’s iShares MSCI Frontier 100 Index Fund demonstrates one way that BlackRock is trying to fend off competition from low-cost rival The Vanguard Group, which has been taking market share away from the firm in the $1.2 trillion U.S. ETF space, experts said.

BlackRock Chief Executive Laurence Fink on Monday announced the firm would cut expenses on certain ETFs in the fourth quarter to better compete with lower cost products. While the move will mean reduced margins on those ETFs, the firm will continue to see increasing margins by building out its innovative ETFs, he said.

The iShares new frontier markets ETF costs a bit more than its peers at 0.79 percent, compared to the Guggenheim ETF, which costs 0.70 percent.

Thursday’s launch is an example of an ETF that Vanguard most likely will not try to mimic with a lower cost alternative, said Tim Strauts, an ETF analyst at Morningstar Inc.

“Vanguard is much more conservative so they only launch products they believe in investing themselves and I doubt Vanguard is really recommending that investors get involved in frontier markets,” he said. “They are not going to launch an ETF in this space.”

But Tom Lydon, president of Global Trend Investments, a registered investment adviser and editor of, disagrees.

While iShares may have beat Vanguard getting to market with this ETF, Lydon said Vanguard could follow if the firm believes there is demand.

“Never say never,” he said.

A Vanguard spokesman declined to comment.

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