Seeking Alpha - Diego Stendardo

16th June 2008

I am quite disappointed with the latest filings and listings of the new "Frontier Markets" ETFs. John Christy has made an excellent analysis of the recently launched Claymore Frontier Markets ETF (FRN) and I totally agree with him.

The upcoming Powershares MENA Frontier Portfolio (PMNA) isn't much better, as it is limited to the Middle East and Northern Africa.

What investors would really like to see on the shelves is a global frontier ETF, just like what iShares MSCI Emerg Mkts Index (EEM) and Vanguard Emerging Markets Stock VIPERs (VWO) had offered when everybody was paying attention to emerging markets, and I hope Van Eck will do a better job with its upcoming fund.

The optimal choice in my opinion would be to stick to the S&P/IFCG Extended Frontier 150 Index.

Among its holdings, I'd highlight Emaar Properties, a property investment and development company from the UAE, Nigeria's First Bank and Zenith Bank and Slovenia's pharmaceutical company KRKA.

Actually I would like to see more of Vietnam (1%) and Ukraine (0.5%) in the index, with the latter being my favorite frontier market, completely overlooked by the financial community.

I've been to Ukraine five times in the past six years and I am astonished at the improvements and the results the Ukrainian Government has achieved in such a short time. A smart move, for example, has been quickly abolishing the mandatory visa to enter the country for EU and Swiss citizens in may 2005. Since then, the number of tourists and interested investors from Europe has tripled and the Euro has replaced the US dollar as the currency of choice for everyday transactions.

It is the second largest country in Europe, after the European part of Russia, is home to almost 50 million citizens with a growing middle class, its GDP grew 6% in 2006 and more than 7% in 2007, and despite the global credit crunch, it is projected to grow slightly less than 6% in 2008; it is strategically placed between Europe, Russia and Asia and has access to the Black Sea through the seaport city of Odessa which represents a major transportation junction integrated with railways.

So I am really surprised that I haven't yet seen any CEF or ETF dedicated to this very promising country; we have a choice of funds for Cuba (CUBA) , Vietnam (VTOPF.PK) and Thailand (TTF), but to date Ukraine is being completely ignored in the US and Europe too. Yes, there are some private equity funds, but they are off limits to laymen.

I am not aware of any ADRs traded in the US, and here in Europe as well it's not easy to get hold of Ukrainian businesses through your everyday broker. There are I guess no more than five small- and mid-caps traded in Germany and in London (mostly mining). That's all.

Ukraine is not a major player in the energy sector, unlike its neighbour Russia, so my pick would be the financial sector there, and my favorite proxy is Italian banking group Unicredit, the leading international bank in Central and Eastern Europe, with 3,100 branches and 24 million customers in Azerbaijan, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Kazakhstan, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine.

Other companies, more suitable to US investors, might be Russian Mobile Telesystems (MBT) and Vimpel Communications (VIP) as well as Turkish TurkCell (TKC). This is quite a poor selection in that they're all in the same industry and Ukraine represents just a fraction of their revenue.

Indeed, Ernst & Young associate director Oleksandra Dubovyk, as stated in this article, expects some 80 Ukrainian firms to raise funds via initial public offerings in the next two to three years, but for the time being I feel like I'm missing a big opportunity.