Looking for a different way to play emerging markets exchange-traded funds? The Alpha Architect Freedom 100 Emerging Markets ETF (FRDM) that launched Thursday might be your ticket.
The fund tracks the Life + Liberty Freedom 100 Emerging Markets Index that starts with a universe 26 emerging-market countries. From there, it screens them for country-level market capitalization, assigns freedom scores for countries based on 79 quantified freedom variables, and excludes companies with 20 percent or more state ownership.
The end result is a portfolio with about 100 holdings that seeks to capture long-term alpha from what’s called the “freedom premium”—i.e., the notion that freer markets can experience more sustainable growth and faster recovery due to their more efficient use of capital and labor.
It allocates higher weights to what are deemed to be freer markets, and Alpha Architect says the fund’s approach leaves out the worst human rights offenders and rewards countries that promote human and economic freedom.
Based in the Philadelphia suburb of Broomall, Pa., Alpha Architect is a money management firm that entered the ETF space in 2014 and now has five factor-focused ETFs with total assets under management of $392 million.
Life + Liberty Indexes is a company that looks at the relationship between freedom and markets. It believes that civil, political and economic freedoms work together and should be measured as a composite.
The civil freedoms it measures run the gamut from violent conflict and internal organized crime to detainments and torture. Political freedoms include rule of law, due process, and freedom of movement and expression, among other aspects. Economic freedoms incorporate the likes of legal system and property rights, along with business, credit and labor regulations.
For the Alpha Architect Freedom 100 Emerging Markets ETF, this results in a portfolio composed of companies from 10 nations. The largest country weights are Taiwan (23.2 percent), South Korea (17.4 percent), Poland (15 percent) and Chile (14.9 percent).
Other countries that made the cut are South Africa, Philippines, Mexico, Indonesia, Thailand and India. China is excluded, which in and of itself is a huge differentiator for this fund within the emerging-markets sector. Time will tell whether that will help or hurt the fund’s performance. Other notable exclusions are Russia and Brazil.
The FRDM fund’s top holdings are Taiwan Semiconductor and Samsung Electronics at 11.7 percent and 9.2 percent, respectively. All other holdings comprise 3.6 percent or less of the portfolio.
Fund constituents are market-cap weighted within their freedom-weighted country allocations.
The fund’s expense ratio is 0.49 percent. Its index will be reconstituted and rebalanced annually in January.