Freedom Factor Blocks China

October 03, 2019 There are a few emerging market index out there that don't have China in them, yours included. How does weighting countries by their freedom level compare to these other ex-China benchmarks?

Tolle: So, if you just want to cut China out of your emerging market index, there's the MSCI Emerging Markets ex-China Index. [Two ETFs track this benchmark, the $28.6 million iShares MSCI Emerging Markets ex China ETF (EMXC), and the $2.4 million KraneShares MSCI Emerging Markets ex China Index ETF (KEMX)].

There's also another one by what used to be Emerging Global Advisors, which was bought by Columbia Threadneedle. They now have an ETF based on that, too. [The index is the Beta Thematic Emerging Markets ex-China Index, tracked by the $11.5 million Columbia EM Core ex-China ETF (XCEM).]

The difference between the Life + Liberty Freedom 100 Emerging Markets Index and these other indexes is that we're not just killing China out of the index as our part of our objective. Our objective is to give freer countries a higher allocation. So we also don’t currently have Russia, Egypt, Saudi Arabia. We’re not “ex” any particular country. We hope all these countries become free enough to be in the index.

But ultimately, the correlation between these indexes [and to the vanilla benchmark] is high, because instead of China, we hold high allocations in Taiwan and South Korea, which are countries highly correlated to China. You'd expect the correlations to be pretty high.

So you don't lose anything by going ex-China, and you don't lose anything by going freedom-weighted. It's a form of expression for investors. If you want to express your values through your portfolio, this is one way to do so. What’s something you see going on in emerging markets right now you think investors are overlooking?

Tolle: There are some frontier markets that are very close to becoming emerging that are under-noticed. It would be interesting to create a product off them, though it would be hard to do, because they're not as tradable and liquid. Size of market is an issue. Still, there are some very free frontier markets, and others that have made a lot of strides in increasing their freedom levels.

Some of them are post-communist countries, like Estonia. Vietnam, too. Vietnam feels like it's been on the cusp of moving up to emerging for a long time.

Tolle: Yes. Also, I think maybe the some of the classifications could use an update—which countries are emerging, which are developed. That would be interesting to see an update on. FRDM has been on the market since May. What’s one thing about running an ETF that you didn't see coming?

Tolle: There are a lot of things, actually. Even back when I had only the index, it was very low pressure. When you just have an index, people say to your face, "Oh, this is awesome!" but you don't know if they're actually going to invest.

Now that it’s launched, we've seen waves of grassroots interest. If you look at our trades, many of them are in 100 shares, round lots. And there are just a lot of them. That grassroots retail support we've had, I so appreciate.

I know that, over the long run, historically, freer countries do better. You see it over and over.

Contact Lara Crigger at [email protected]

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