This ETF is compose of top 10 countries that, foremost, have the most freedom (Data from Fraser Institute, Cato Institute, and Friedrich Naumann Foundation for Freedom) and are considered to be emerging markets. Such weighing removes less free countries relative to those that are more. This means China, Saudi Arabia, Russia, and others alike are outcompeted by those like Taiwan, Poland, and South Korea. The 10 countries currently weighed from most free to least are:
- Taiwan 22.69%
- Poland 16.58%
- South Korea 15.52%
- Chile 14.53%
- South Africa 7.77%
- Indonesia 6.78%
- Mexico 5.25%
- Philippines 4.95%
- Malaysia 4.00%
- Brazil 3.00%
The reallocation according to freedom is done annually and the Freedom Score used for that is a proprietary algorithm. I believe in 2021, Poland was 1st, and India also had a spot on the list. From inception on 23 May 2019 to today 18 Feb 2022, it has gained 35.24%, underperforming the SPY by 18.67%, VT by 3.59%, and evened with VEQT. While not exceptional, it does match world index ETFs.
However, when compared to other emerging market ETFs, FRDM has outperformed EEM, XEC, VEE, and ZEM by a range of 10.36% to 18.79%. The dips and rises among them are synced until Feb 2021. Where all emerging market ETFs are experiencing falls since, FRDM is flattening. This is most likely due to tech crackdowns from the Chinese government.
What about emerging market ETFs ex China? EMXC, XCEM, and KEMX all have none or greatly reduced China allocations according to MorningStar at 0.10%, 0.36%, and 0.00% respectively. However, they do include autocratic countries like Russia, Saudi Arabia, and currently Thailand. Their performance versus FRDM are in sync but does have very slight under performance ranging from 1.99% to 4.34%. I don't know if the inclusion of those countries had impact. Maybe Russian allocation such as 5% made them dip a bit.
What's the theory behind this FRDM weighing? According to the Chinese-American Founder Perth Tolle, historically, countries with greater freedom, politically and socioeconomically, had greater economic growth also lower draw downs. This is found in developed markets' history, and all countries with those markets are ranked high in the Freedom Index. Without much distinction with each other in their level of freedom, the founder saw few opportunities to capture α. However, in emerging markets, their countries' freedom levels are all over the place. With difference in freedom, FRDM was created to bet on countries with more than those with less. This is the distinguishing feature of FRDM. Other emerging markets ETFs weighs all, or exclusively pluck China out due to that specific country's risk.
The downside to this ETF is that I don't think it has competition. Therefore, its fee reflects it by charging twice than nearly other ETFs at 0.49%. The only other ETF that was higher was EEM, charging 0.68% for some reason, but that's an outlier.
I am highly interested in purchasing this ETF with a significant allocation to my portfolio. I don't know any allocation theories to know how much yet. However, if there are world index ETFs that are also weighed in similar manners, I'll gladly buy that and abandon VEQT altogether because I don't want to invest my money to any autocratic countries. What do you guys think?
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