MSCI Frontier Markets Index
MSCI Frontier Markets Index (MSCI FM Index) is a global stock market index that measures the performance of large-capitalization and mid-capitalization companies across frontier market economies. Developed and maintained by MSCI Inc., the index serves as a benchmark for equity investments in markets that are generally less developed, less liquid, and less accessible than those classified as emerging markets. It is widely used by institutional investors, exchange-traded funds (ETFs), index funds, asset managers, pension funds, and financial researchers for portfolio benchmarking, passive investing, and international asset allocation.
The MSCI Frontier Markets Index represents the investable equity opportunity set within countries classified by MSCI as frontier markets. Constituents are selected using transparent rules based on free-float market capitalization, liquidity, foreign ownership accessibility, and investability. By applying a free-float market capitalization-weighted methodology, the index seeks to represent the portion of frontier equity markets that is available to domestic and international investors.
Frontier markets typically exhibit lower levels of market capitalization, trading liquidity, and institutional development than emerging or developed markets. Nevertheless, they often offer investors exposure to economies with relatively high long-term growth potential, expanding consumer markets, and increasing financial market development. The MSCI Frontier Markets Index provides a standardized benchmark for measuring the performance of these markets while facilitating international portfolio diversification.
Because economic conditions, market accessibility, and regulatory frameworks evolve over time, MSCI periodically reviews both constituent companies and country classifications to ensure that the index continues to represent the investable frontier market universe.
History
The rapid globalization of capital markets during the late twentieth century increased investor interest in economies beyond the traditional developed and emerging markets. As smaller stock exchanges matured and opened to foreign investment, demand grew for standardized benchmarks measuring the performance of these relatively early-stage financial markets.
To address this need, MSCI introduced the Frontier Markets Index in 2007. The new benchmark complemented the MSCI Emerging Markets Index by providing coverage of countries whose equity markets were investable but did not yet satisfy MSCI's criteria for emerging market classification.
Since its introduction, the index has expanded and evolved as additional frontier markets improved their financial infrastructure, regulatory environments, and market accessibility. Periodic country reclassifications have resulted in some markets being promoted to emerging market status, while others have entered or exited the frontier market category.
Today, the MSCI Frontier Markets Index remains one of the leading benchmarks for frontier market equity investing.
Objectives
The principal objectives of the MSCI Frontier Markets Index are to:
- measure the performance of frontier equity markets;
- provide a standardized investment benchmark;
- facilitate passive investment strategies;
- support international diversification;
- improve comparability among frontier markets;
- represent the investable frontier market universe.
These objectives enable investors to evaluate frontier market performance using a consistent methodology.
Methodology
The MSCI Frontier Markets Index employs a free-float market capitalization-weighted methodology.
Each constituent's weight is determined according to its free-float-adjusted market capitalization rather than its total outstanding shares. Holdings that are not readily available for public trading are generally excluded through the application of a free-float adjustment factor.
The adjusted market capitalization is calculated as:
where:
- is the market price per share;
- is the number of outstanding shares;
- is the free-float adjustment factor.
The aggregate adjusted market capitalization of all constituent companies determines the index value and constituent weights.
Country classification
MSCI classifies markets using objective criteria relating to economic development, market accessibility, and operational efficiency.
Frontier markets generally exhibit characteristics such as:
- relatively small equity markets;
- developing financial infrastructure;
- limited market liquidity;
- improving foreign investment accessibility;
- evolving regulatory systems.
Market classifications are reviewed periodically and may change as countries satisfy the requirements for emerging market classification or experience changes affecting investability.
Constituent selection
Companies included in the index are selected according to transparent eligibility requirements.
Selection criteria include:
- free-float market capitalization;
- liquidity;
- trading frequency;
- investability;
- foreign ownership availability;
- exchange listing.
MSCI periodically reviews constituent eligibility to maintain representative market coverage.
Geographic representation
The MSCI Frontier Markets Index includes companies from frontier economies located in several regions of the world.
Representative regions include:
- Africa;
- the Middle East;
- Eastern Europe;
- Asia;
- Latin America.
The number of countries represented changes over time as markets are reclassified or become eligible for inclusion.
Sector representation
The index includes companies from a broad range of industries.
Major sectors represented include:
- financial services;
- industrials;
- telecommunications;
- consumer staples;
- consumer discretionary;
- materials;
- healthcare;
- energy;
- utilities;
- information technology.
Sector weights vary according to changes in market capitalization and periodic index reviews.
Index maintenance
MSCI regularly reviews the index to maintain its representativeness and investability.
Maintenance activities include:
- constituent additions;
- constituent deletions;
- free-float adjustments;
- corporate action adjustments;
- country classification reviews;
- scheduled rebalancing.
These reviews ensure that the index continues to reflect developments within frontier equity markets.
Applications
The MSCI Frontier Markets Index is widely used in the investment industry.
Its principal applications include:
- portfolio benchmarking;
- exchange-traded funds;
- index funds;
- institutional investment;
- international diversification;
- asset allocation;
- financial research;
- performance evaluation.
Many specialized frontier market investment products use the index as their benchmark.
Advantages
The index offers several important advantages.
It provides diversified exposure to frontier economies through a transparent and internationally recognized methodology. Its free-float weighting reflects the investable market, while its broad geographic representation reduces dependence on any single country.
The index also enables investors to access markets that may exhibit different economic growth patterns and return characteristics from developed and emerging markets.
Limitations
Despite its benefits, the MSCI Frontier Markets Index has several limitations.
Frontier markets generally experience lower liquidity, higher transaction costs, and greater political, economic, and regulatory uncertainty than more developed markets. Currency volatility, limited foreign ownership, and relatively small market capitalizations may also increase investment risk.
Furthermore, changes in country classifications or market accessibility may significantly affect index composition and investment performance.
Relationship with other MSCI indices
| Index | Primary coverage |
|---|---|
| MSCI World Index | Developed markets |
| MSCI Emerging Markets Index | Emerging markets |
| MSCI Frontier Markets Index | Frontier markets |
| MSCI All Country World Index | Developed and emerging markets |
Together, these indices provide comprehensive coverage of global equity markets across different stages of economic development.
Importance
The MSCI Frontier Markets Index is the leading benchmark for frontier market equities and provides investors with a standardized measure of the performance of developing financial markets. It supports portfolio diversification, passive investing, and international asset allocation while improving transparency and comparability among frontier economies.
The index also plays an important role in attracting international investment to smaller capital markets and promoting the integration of frontier economies into the global financial system.
Impact
Since its introduction in 2007, the MSCI Frontier Markets Index has significantly influenced frontier market investing by providing a transparent, rules-based benchmark for economies at an earlier stage of financial market development. Its widespread use by institutional investors, index funds, and exchange-traded funds has contributed to greater international visibility, increased capital flows, and enhanced recognition of frontier markets within the global investment community.