Remember when you thought an exchange-traded fund targeting Nigeria sounded over the top?
Here comes the Global X MSCI Pakistan ETF (PAK), the first ETF to offer local exposure to Pakistan’s stock market. For individual investors, this means easy access to a market you might otherwise never be able to tap.
So, should you?
Pakistan is a "frontier" market—it's less developed, less liquid, and less stable than even the emerging markets. Frontier markets are those hoping to someday graduate to emerging-markets status, as Qatar and the United Arab Emirates did last year. They can produce big returns, and big losses. Many refer to them as “pre-emerging.” This is where Brazil and China were in the 1990s.
The nation and its markets have decent long-term prospects, thanks to a young labor force, increased trade and infrastructure projects with China, and a move toward privatization. It is also an unstable country known for military coups and a famous, now departed resident named Osama bin Laden.
While Pakistan has a population greater than Russia's, its economy is pretty small––about the size of Ireland’s––and its stock market is roughly the size of Greece's. As with most developing-market ETFs, PAK’s holdings come largely from the financial, energy, and materials sectors.
One attraction of frontier markets to investors is that the stocks tend to move independently of the U.S. market, helping diversify a portfolio. Pakistan’s stocks have no appreciable correlation with the S&P 500 Index, about the same as gold.
Compare that to emerging markets, which move with the U.S. about 70 percent of the time. Still, individual investors would probably never own enough of a frontier market to take full advantage of that benefit. This is why PAK may be a better tool for a professional money manager or an institution than for a retail investor.
It's no accident that PAK came out now. The MSCI Pakistan Index is up 150 percent in the past five years. Like other frontier ETFs, PAK was launched after the country went on a nice run. This helps boost the hype and the marketing effort, but can increase the danger for investors since it means investing nearer the top.
Nigeria was on an 85 percent one-year run when the Global X Nigeria ETF (NGE) launched; in the following year the ETF dropped 32 percent. Another example is the Market Vectors Vietnam ETF (VNM), launched in 2009 on the heels of a 109 percent six-month tear, only to drop 12 percent in the year after VNM’s launch. The Global X Argentina ETF (ARGT) made its debut after a 93 percent run and fell 12 percent in the six months afterward.