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What is the difference between the major international stock classifications (Developed vs Emerging vs Frontier)?

This week, we are answering questions on international investing. We will be covering taxes, diversification, currency impacts, and more. But first let’s start with the basics.

Today’s question is:

“What is the difference between the major international stock classifications (Developed vs Emerging vs Frontier)?”

 

Transcript - Developed vs Emerging vs Frontier International Stock Markets

Generally you will see 3 different international stock classifications; Developed, Emerging, and Frontier.

What’s the difference?

 

Developed international stock markets are today’ modern, built up, established countries. For most developed international stock indexes, the largest holdings are stocks from Japan, the United Kingdom, France, Canada, and Germany. But in total, these international developed funds hold stocks from as many as 25 different countries.

For our clients, we use a state street ETF with the ticker symbol SPDW for exposure to this area.

Next is emerging markets, these are countries that are rapidly growing, but still lack the modern financial infrastructure as the developed nations. Today, the primary constituents of an emerging market fund is China, Taiwan, India, Brazil and South Africa.

For our clients, we use another stare street ETF with the ticker symbol SPEM for exposure to emerging markets.

Lastly, frontier markets. This is a relatively new area of focus for funds. These are rapidly growing, but very volatile countries that are just beginning to build out their financial infrastructure. Today, top constituents in a frontier market fund are Kuwait, Vietnam, Argentina, Kenya and Morocco.

For clients, we use an iShares ETF with the ticker symbol FM for exposure to these frontier markets.

U.S. stocks have been outperforming their international counterparts.

By how much?

Over the last 12 years, the S&P 500 has averaged an 8.25% compounded annual return. Developed and emerging markets have averaged just 1.5%! Frontier market funds have only been around for about 5 years now, and over that time they have averaged a 4.4% average compounded annual return.

But remember, past performance is no guarantee of future returns. And if history tells us anything, it is that sooner or later these international stocks will have their day in the spotlight once again.

Matt Hylland