High dividend yields, historically cheap valuations and a low correlation to established indices make frontier markets interesting. But there are risks.
• Frontier markets rank below emerging markets in the index hierarchy
• MSCI Frontier Markets Index rose by 47.5 percent in 2025; hardly any private investors had these markets in their portfolio
• Low correlation to US stocks as a diversification advantage
What are Frontier Markets?
Index providers such as MSCI and S&P divide the world of stock markets into three tiers: developed markets, emerging markets and frontier markets. Frontier markets are not just smaller: “The political and legal framework, investor access, free movement of capital or simply the size of the economy are often not at a standard that would attract international investors on a broad scale,” explained Marcus Weyerer, director of ETF investment strategy for the EMEA region at Franklin Templeton, in an interview with extraETF.
The index provider MSCI currently combines 28 such countries in the MSCI Frontier Markets Index, which contains 247 companies with a coverage of around 85 percent of the freely tradable market capitalization in each country. Within the index, Vietnam dominates with a weight of 28.5 percent, followed by Romania (12.8 percent), Morocco (10.9 percent) and Kazakhstan (6.9 percent). As Weyerer explains in the interview, these are “niche investments”.
The MSCI Frontier Markets had a market capitalization of just $191.5 billion at the end of the first quarter of 2026, while the MSCI Emerging Markets Index had a market capitalization of $10.21 trillion. The median company market capitalization in the Frontier Index is $387 million. In the German SDAX, the small-cap segment of the Deutsche Börse, less than five percent of the 70 stocks have an even lower market capitalization.
Valuation and Dividends
The MSCI Frontier Markets Index rose by around 68 percent in the three years up to 2026; in 2025 alone, according to the official fact sheet, the index recorded an annual performance of 46.86 percent. There is no speculative push behind this development, but rather an unusual combination of low valuation and high payout ratio. According to the MSCI fact sheet as of March 31, 2026, the dividend yield of the MSCI Frontier Markets Index was 3.39 percent and the price-to-earnings ratio was 12.34. This means that the index is valued more favorably than the iShares MSCI ACWI ETF, which had a P/E ratio of 21.77.
James Johnstone, fund manager at Redwheel Next Generation Emerging Markets Equity Fund, tells extraETF about stocks included in the index that many of them offer a dividend yield “that even exceeds the price-to-earnings (P/E) ratio. This is a rare phenomenon in the stock markets and indicates unusually cheap valuations.”
Currencies, reforms and the Argentina example
In addition to valuation and dividends, Redwheel cites another factor: the recovery of frontier currencies. “Frontier market currencies bottomed in 2024 and have been recovering since 2025,” explains Johnstone. There were also structural reforms in individual countries, some of which had spectacular effects.
Argentina is cited as a particularly impressive example: Following the market economy reforms under President Javier Milei, the MSCI Argentina Index increased more than ninefold from its low point in March 2020 to the end of May 2025, corresponding to an average annual growth rate of 60.3 percent, as Johnstone reports to extraETF. An individual case that shows what price dynamics can arise when low-valued markets take a more politically stable path. However, Argentina is not a permanent situation: the country has switched between MSCI categories several times in the past, which underlines the volatility of such assessments.
Correlation and diversification
A central argument for frontier markets as a portfolio addition is their low level of synchronization with established markets. According to data from Bloomberg and Redwheel, the correlation of the MSCI Frontier Markets to the MSCI USA Index is 0.55, to the MSCI EAFE (industrialized countries excluding the USA and Canada) at 0.64 and to the emerging markets at 0.62. For comparison: Emerging Markets and MSCI USA already correlate more strongly with each other at 0.66.
The lower co-movement behavior is due, among other things, to the fact that frontier markets are more dependent on local factors: domestic demand, raw material exports, tourism and precisely those reform agendas that are largely disconnected from global economic cycles. While low correlation does not reduce individual market risk, it can dampen the overall volatility of a diversified portfolio.
Risks: What investors need to know
But frontier markets are at the bottom of the index hierarchy for a reason. The main risk is low market liquidity: in many of these countries, the tradable volume is so limited that larger buy or sell orders can move the prices themselves.
Political risks are also structurally higher than in developed markets. Changes in government, capital controls, corruption and a lack of legal certainty can devalue investments overnight. In addition, there are pronounced currency fluctuations and sometimes considerable information asymmetries, as companies in many frontier countries are subject to lower reporting obligations than in OECD countries. The fund volume of the only UCITS ETF on the MSCI Frontier Markets that is widely accessible to German investors is only around eleven million euros, which reflects the low institutional interest in this asset class and prolongs the liquidity problem at product level.
Paul Schütte, editorial team at finanzen.net
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