Liquidity and concentration risk

Liquidity: the exit-door problem

Liquidity risk is the gap between the price on the screen and the price you can actually transact at, in size, when you want to. In frontier markets daily trading in a 'major' listed company can be thousands of dollars, not millions; a modest foreign order can move the price, and in a stress everyone's exit door is the same narrow one.

Fund wrappers do not remove the risk — an ETF on an illiquid market can trade at persistent premiums or discounts to its net asset value, and redemptions in a panic transmit the illiquidity straight through.

Concentration: when five names are the index

Emerging and frontier indexes are often top-heavy: a few banks, a telecom, and a commodity producer can be half the index. A single-country fund is therefore less diversified than it looks — it is a bet on a short list of companies, one currency, and one government. Even broad EM funds concentrate: the largest few countries dominate the weight, so 'emerging markets' as an allocation is substantially a bet on its biggest constituents.

The practical response is to look through the wrapper: this site lists each country's largest listed companies precisely so the concentration is visible before purchase.

Largest companies by market →