Alpha Architect has launched a new ETF in the US that offers a unique approach to investing in emerging market equities.
The fund provides exposure to emerging market countries that score favourably in terms of the freedoms enjoyed by their citizens.
The Freedom 100 Emerging Markets ETF (FRDM US) selects and weights countries according to the freedoms enjoyed by their citizens.
The fund is linked to the Life + Liberty Freedom 100 Emerging Markets Index which starts with a universe of 26 emerging market countries, each of which has a stock market that accounts for at least 0.15% of global market capitalization.
Country inclusion and weights are determined based on a ‘Freedom Score’ derived from 79 quantifiable freedom metrics. These metrics are categorized into three main types of freedoms: the rights to life (such as absence of terrorism, human trafficking, torture, and political detentions), liberty (such as rule of law, due process, freedom of the press, freedom of religion, freedom of assembly), and property (such as marginal tax rates, access to international trade, business regulations, established monetary and fiscal institutions, and size of government).
The Freedom Score is translated into a relative weight for each country which can be positive or negative. Emerging markets with positive weights are included in the index and their weights are rebased so as to sum to 100%.
The methodology then selects the top ten securities within each emerging market based on a combined rank of market capitalization and liquidity, excluding state-owned enterprises which are defined as having greater than 20% government ownership. Securities are weighted by market capitalization within their freedom-weighted country allocations. Reconstitution and rebalancing occur annually in January.
The index composition looks notably different compared to mainstream emerging market benchmarks. Many typically prominent countries, including China, Brazil, and Russia, are ineligible for inclusion due to concerns over their restrictions on citizens’ freedoms. And it is worth noting that index provider Life + Liberty Indexes‘ definition of what constitutes an emerging market includes Taiwan, South Korea, and Poland, countries that some index providers argue are already developed.
Ten countries have been allowed into the index. The largest is Taiwan at 23.2%, with significant exposure also allocated to South Korea (17.4%), Chile (14.9%), and Poland (15.0%).
Due to the large allocations to Taiwan and South Korea, the index contains a degree of stock-specific risk within its two largest holdings – Taiwan Semiconductor accounts for 11.7% of the total weight while Samsung Electronics makes up 9.2%.
The ETF is listed on Cboe BZX Exchange and comes with an expense ratio of 0.49%.