‘Freedom’ Based ESG ETF Coming

February 21, 2019

On Wednesday, Alpha Architect filed for its first socially responsible fund, the Alpha Architect Freedom 100 Emerging Markets ETF, trading under the ticker 'FRDM.'

The fund, which would trade on the Cboe Global Markets, parent company of ETF.com,  and will track the Life + Liberty Freedom 100 Emerging Markets Index, a benchmark provided by boutique indexing shop, Life + Liberty Investments. (Read: "Human Freedoms Make Better Markets.")

Investing In "Freer" Emerging Markets

Underpinning FRDM's index is the thesis that freedom can be used as an economic barometer, in that governments that treat their citizens better tend to have stronger, more robust markets.

It's an idea supported by decades of research, says Perth Tolle, Life + Liberty's founder.

"Emerging markets are high in potential, yet full of autocratic regimes with oppressive practices," she told ETF.com.

However, existing emerging market indexes "make no distinction between metrics used to weight developed markets, which are all fairly free and homogeneous, and emerging markets, which have huge discrepancies between their freedom levels."

Defining "Freedom"

FRDM's benchmark would consist of roughly 100 equity securities listed in emerging markets countries with a high "freedom" score.

This score is determined by 79 personal and economic criteria that evaluate a country's ability to guarantee its citizens' rights to life, liberty and property. It is derived using data from governments, non-governmental organizations like the World Bank, private sector firms and others.

Some of the factors that go into the score include whether a country engages in torture or political detentions; whether it secures freedom of the press and assembly; and how it implements marginal tax rates and business regulations.

Tilts Toward Tech, Financials

A quantitative model is then used to rank and weight countries based on these freedom metrics. Though the starting country universe includes 26 names, only10 countries are included the final index: Taiwan, South Korea, Chile, Poland, South Africa, Philippines, Mexico, Indonesia, Thailand and India.

For each country, the top 10securities are selected for inclusion, based on market capitalization and certain liquidity thresholds. State-owned enterprises (SOEs) are excluded.

The resultant index is weighted by market cap at the security level. As of the time of filing, FRDM's starting index tilted heavily toward firms in the  finance (32%) and technology (26%) sectors.

The index is rebalanced and reconstituted annually, in January.

Firm's First ESG ETF

Alpha Architect, an RIA that launched its first ETFs in 2014, currently has five other funds under its belt. The largest of those is the $101 million Alpha Architect Value Momentum Trend ETF (VMOT).

FRDM represents the firm's first partnership with a third-party index provider, as well as its first foray into socially responsible investing.

A subsidiary of Alpha Architect, Empowered Funds, LLC will serve as FRDM's advisor.

No expense ratio has yet been listed for the fund.

Contact Lara Crigger at [email protected].

 

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