Frontier emerging markets are small countries, but they have delivered some big-league performance returns of late.

Over the past year, frontier markets have outperformed stocks from Japan, Europe, and the U.S.

The term “frontier market” began to take root in the early 1990s to describe countries that are a subset of emerging markets but with lower market capitalizations and less liquidity.

Historically, emerging markets have been dominated by BRIC countries (Brazil, Russia, India, and China).

But after years of high growth, BRICs have aging populations, slowing growth, and increased market correlations to developed markets.

Major index providers like FTSE and MSCI classify countries like Argentina, Bangladesh, Nigeria, Slovenia, and Vietnam as frontier markets. At times, there will be differences in opinion.

For instance, during its May 2014 annual index review, MSCI upgraded Qatar – a sovereign Arab emirate located in western Asia – as an emerging market. FTSE, on the other hand, still lists Qatar as part of its FTSE Frontier 50 Index.  

Like Qatar, the United Arab Emirates was also upgraded to emerging market status by MSCI. Both countries have been stellar performers. Through May 2014, Qatar’s stock market increased almost 50% while the UAE’s Dubai Index soared around 115%.

f there’s one segment of the equity market the typical investor is missing inside their portfolio, it’s probably frontier markets. This is unfamiliar territory for many clients, so one way of keeping the conversation simple and concise is to explain frontier markets as small-cap emerging market countries.

Frontier market countries have higher volatility compared to developed markets and frequently have frightening problems. In Nigeria, a terrorist group called Boko Haram is kidnapping and killing civilians in its attempt to overthrow the government.

The iShares MSCI Frontier 100 ETF (FM) has gained around 23% over the past year, easily outperforming both BRIC and broader emerging market funds like the Vanguard Emerging Markets Stock ETF (VWO). With Qatar and UAE no longer represented in FM, other countries like Argentina, Kuwait, and Nigeria are among the top equity regions.

(Year to date, FM is up about 17% vs. roughly 5.5% for the S&P 500 (SPY); meanwhile the iShares MSCI Philippines ETF (EPHE) has outperformed both these broader ETFs, with a jump of around 18% through June 6.)