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Afghan refugee children play in a field as the sun sets on the outskirts of Islamabad, Pakistan, Monday, Nov. 25, 2013. Pakistan hosts over 1.6 million registered Afghans, the largest and most protracted refugee population in the world, according to the U.N. refugee agency, with thousands living without electricity, running water and other basic services.Muhammed Muheisen/The Associated Press

One of the hottest investment areas in the past couple of years has been frontier markets. The name has a Wild West connotation and in financial terms that's not too far a stretch.

Frontier markets have been described as the riskiest places in the world to invest. They include countries that are economically far behind the developed world and may not even have a stock market. We used to lump them in with emerging markets but they aren't even that advanced. Think Algeria, Morocco, Vietnam, Pakistan, Kenya, and Nigeria and you get the idea.

Although they're risky, they offer exciting profit potential for investors who can handle the ups and downs. In September 2012, the U.S. division of BlackRock Capital moved to tap into the growing interest in these markets by launching the iShares MSCI Frontier 100 ETF. As of May 15, the fund had accumulated $833-million in assets under management – a staggering amount in less than two years.

Why the rush to get on board? Look no farther than the performance numbers. Since inception, the fund has posted an average annual compound rate of total return of 28.66 per cent (results to April 30). With numbers like that, risk takes a back seat to greed.

Those are impressive results. However, there are some major changes coming. This month the fund is losing two of its biggest components, Qatar and the United Arab Emirates, which are being promoted to the MSCI Emerging Markets Index. They represent almost 38 per cent of the Frontier Markets ETF's total assets, which means there is a huge hole that will have to be filled.

Russ Koesterich, chief investment strategist for BlackRock Capital, which owns the iShares franchise, tried to put a positive spin on this development in a recent note, saying, "My sense is that the new portfolio of companies in the index following the rebalancing will more accurately reflect what most people think of when they consider investing in frontier markets".

That may be, but will they perform anywhere near as well? Investors in the fund will find they are holding larger positions in countries like Pakistan, Sri Lanka, and Vietnam as the geographic mix is adjusted to compensate for the loss of Qatar and the UAE. The sector mix will also change, with less exposure to financial stocks and more to consumer staples and energy.

The bottom line is that there is a lot of uncertainty about how the rebalancing will affect performance so my advice at this stage is not to jump on the frontier markets bandwagon until we get a better handle on the situation. Whenever more than a third of a portfolio gets turned over in one shot, it's only prudent to stand clear until the dust settles.

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