First Trust has introduced a new ETF delivering an unconventional play on emerging market equities by investing only in countries considered to be sufficiently supportive of ‘human flourishing’.
The ETF targets only emerging market countries that support political rights, civil liberties, freedom of expression, and freedom of religion.
The First Trust Emerging Markets Human Flourishing ETF (FTHF US) has been listed on NYSE Arca with an expense ratio of 0.75%.
The listing dovetails with IMF data suggesting that most global economic growth in the coming years will be sourced outside the US, especially in emerging markets.
Emerging markets may also experience different economic cycles relative to the US, offering a layer of diversification for investors.
Despite these benefits, many investors may be hesitant to allocate capital to traditional emerging market vehicles, citing concerns about exposure to nations whose governments do not treat their citizens with dignity and respect.
FTHF aims to fill this gap by targeting only those parts of the emerging markets ecosystem where political rights, civil liberties, freedom of expression, and freedom of religion are highly regarded.
Methodology
FTHF tracks the Emerging Markets Human Flourishing Index which screens for emerging market countries with sufficiently high ‘Human Dignity Scores,’ as assessed by Freedom House – a majority US government-funded non-profit organization well-known for its research and advocacy on democracy and human rights.
The Human Dignity Score leans heavily on Freedom of Expression and Belief, making up 80% of the score, and Freedom from Religious Persecution, which constitutes the remaining 20%.
Within eligible emerging market countries, companies are further screened to exclude those involved in seven controversial areas. These include known involvements in child or forced labor, non-compliance with the United Nations Global Compact Principles, as well as revenue streams dependent on activities such as abortion, adult entertainment, gambling, alcoholic beverages, and tobacco.
The methodology first selects the largest 150 companies from the eligible universe. These are then pruned down to the 100 securities with the highest ‘Quality Score,’ determined through factor-based analysis considering variability, profitability, and leverage.
Constituents are weighted by float-adjusted market capitalization while capping any country exposure at 20% and any sector exposure at 10% above its weight in the headline Bloomberg Emerging Markets Large & Mid Cap Index. The top five positions are also capped at 8% each, while any other stock is limited to a weight of 4%.
The index is reconstituted annually and rebalanced semi-annually.
FTFH complements First Trust’s earlier product, the First Trust Bloomberg Emerging Market Democracies ETF (EMDM US), which launched in March. Also listed on NYSE Arca with an identical expense ratio of 0.75%, EMDM veers toward investing only in emerging market countries deemed sufficiently democratic.