Who doesn't love a good underdog story?
The exchange-traded fund (ETF) industry has largely been dominated by three heavyweights: Vanguard, State Street, and BlackRock. With other major issuers, such as Schwab, Invesco, and JPMorgan Chase, also looming, it's become increasingly difficult for the little guy to gain traction.
But every once in a while, someone breaks through.
Enter Perth Tolle. Originally a private wealth advisor at Fidelity, she founded Life & Liberty Indexes with a simple premise. When investing in emerging markets, countries with greater levels of personal, political, and economic freedoms are more likely to outperform the broader emerging markets indexes.
In 2017, the Freedom 100 EM Index was launched. Tolle initially pitched an ETF based on the index to several major players, including BlackRock and State Street, but they declined to take it on. In 2018, Alpha Architect agreed to help bring it to market, and in 2019, the Freedom 100 Emerging Markets ETF (FRDM 4.15%), which tracks that index, debuted.
Source: Getty Images.
What is the Freedom 100 Emerging Markets ETF?
The investment process behind this ETF is pretty straightforward. After applying a minimum market cap screen for 24 eligible emerging market economies, each country is scored across 87 different freedom variables. These include levels of violent crime, terrorist activity, corruption, due process laws, freedom of speech, legal system quality, monetary system quality, and regulation.
State-owned enterprises are wisely excluded since profit is often not their primary objective. Qualifying components get market-cap-weighted across included countries.
Image source: Freedom ETFs.
Overall, this is a smart concept that hits on many fronts. All the fund is really doing is pulling out the countries and stocks with the greatest opportunity set for success. By eliminating countries and companies that are facing challenges due to any number of political or economic factors, you put a heavy quality tilt in the portfolio that favors outperformance over time.
NYSEMKT: FRDM
Key Data Points
And outperform it has!
Over the past five years, its 99% total return is nearly 5 times that of the iShares MSCI Emerging Markets ETF (EEM 3.20%).
FRDM Total Return Price data by YCharts. ETF = exchange-traded fund.
Perhaps more impressive is that excluding state-owned enterprises or choosing a quality tilt over the past few years hasn't been an automatic source of extra returns. In fact, neither of those paths has really added to returns at all if you look at the major indexes.
But the Freedom 100 Emerging Markets ETF has managed to pull it off. Its precise selection strategy has managed to pick winners and avoid losers to create a lot of alpha for shareholders.
And investors have taken notice, too. The fund is up to about $2.5 billion in assets under management (AUM). It may not ever compete with the bigger players in terms of sheer size, but its performance record can stand up to any of them!
