Frontier markets: Understanding the risks

In the search for performance and diversification, an increasing number of investors are spicing up their portfolios with frontier market exchange-traded funds. Many factors have led them to gradually consider strategic allocations to these areas, not the least of which is the fact that emerging economies have become more correlated with developed economies. This study examines whether these small economies are suitable to the average investor in regard to the size of their markets, liquidity, and risk-adjusted performance. It is concluded that, for now, only their undeniable diversification benefits—an outcome that modern portfolio theory has taught us to highly value—tilt the odds in their favor.