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The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called Frontier Funds—Travel With Care cautioning investors interested in funds that invest in frontier markets to carefully consider the heightened risks in these markets. While there is no precise definition of a frontier market, frontier funds generally invest in companies located in countries with developing securities markets such as Argentina, Lebanon, Nigeria, Slovenia and Vietnam.
“Investors seeking potentially higher returns in frontier funds should understand that the promise of higher returns always carries more risk—and the past performance of any fund is never a guarantee of future results,” said Gerri Walsh, FINRA’s Senior Vice President for Investor Education. “Before investing in a frontier fund, investors should consider whether and how such an investment might fit as part of a well-diversified portfolio.”
As with any investment, frontier funds have their pros and cons. Frontier Funds—Travel With Care, provides investors with a series of tips to avoid problems.
*Know which frontier markets the fund invests in. Risk factors vary by country—and no two countries share identical risk elements.
*Monitor changes in index components. If you are investing in a frontier ETF or index mutual fund, make sure you know and understand the index that the fund tracks and also the components of that index. The countries included in a frontier index can change over time.
*Geopolitical and currency risks are real. Be aware that some frontier markets are located in parts of the world with unstable political or market environments.
*Factor in costs and fees. Frontier fund costs and fees can be higher than their emerging market peers, and significantly higher than broadly diversified domestic and international managed funds.
*Consider Performance History. Frontier funds are relatively new, and most have limited performance histories.
FINRA’s new Investor Alert provides the investing public with basic information regarding frontier funds and discusses some of the benefits and risks associated with these investments.