Freedom Weighted ETF Debuts

Freedom Weighted ETF Debuts

No China? No problem. 'FRDM' offers a unique take on both emerging markets and socially responsible investing.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

In the increasingly “greenwashed” field of environmental, social and governance (ESG) ETFs, where more and more ETFs are principled in name only, the Freedom 100 Emerging Markets ETF (FRDM) truly stands apart.

The fund, which launches today on the Cboe Exchange, uses a first-of-its-kind "freedom weighted" methodology that selects and ranks countries based on the liberties their governments secure for their citizens. (Cboe Global Markets is the parent company of

It's an idea backed by decades of research, which shows countries that treat their citizenry better also tend to possess healthier, more robust economies (read: "Human Freedoms Make Better Markets").

"Freer markets perform more sustainably, recover faster from economic drawdowns, and use their capital and labor more efficiently," explained Perth Tolle, founder of Life + Liberty Indexes, the sponsor and indexer for FRDM.

Freedom weighting "also makes intuitive sense," added Wes Gray, CEO of Alpha Architect, whose subsidiary, Empowered Funds, LLC serves as FRDM's investment advisor. "Countries with strong capital markets and plenty of economic and political freedom just seem to outperform over the long haul the countries that are going crazy."

How Freedom Weighting Works

To build FRDM's index, Life + Liberty first starts with a potential universe of 26 emerging market nations—including the usual players, such as China, Brazil, Russia and so on (read: "'Freedom' Based ESG ETF Coming").

From there, countries are evaluated on 79 personal and economic freedom indicators, based along three main themes: civil liberties ("life"), political freedoms ("liberty") and economic freedoms ("property").

Countries are evaluated on everything from the amount of violent conflict, torture and human trafficking within their borders; to the establishment of a free press and judicial independence; to the security of property rights and the existence of tariffs and capital controls.

A quantitative model is then used to rank and weight countries by their freedom levels; the 10 countries with the highest freedom levels are selected for inclusion in the index. (That differs from most emerging markets and ESG funds, which select and rank constituents on a security level, rather than on the country level.)

Finally, the top 10 largest securities in each country are selected and weighted based on their market capitalizations and certain liquidity thresholds. State-owned enterprises (SOEs) are excluded from the mix.

Emerging Market ETF Without China?

This methodology results in an emerging market ETF that's vastly different under the hood from competing funds. China, Brazil, Russia, Saudi Arabia and many other developing nations with corrupt or authoritarian governments are nowhere to be found inside FRDM.

In fact, out of more than 220 emerging market ETFs, FRDM is the only one not to allocate to China, without specifically being designed for that purpose.

This is to say, several ETFs explicitly exclude China from their investment universe: the Columbia Beyond BRICs ETF (BBRC); the iShares MSCI Emerging Markets ex China ETF (EMXC); and the Columbia EM Core ex-China ETF (XCEM), among others. But until now, there has never been an emerging market ETF that could include China but that chose not to.

Instead, the highest-weighted country in FRDM is Taiwan, at 23%; followed by South Korea, at 18%; and Poland, at 15%. (Compare that to the iShares MSCI Emerging Markets ETF (EEM), which holds 33% of its portfolio in China.)


Top 10 Country Weights, By Percentage
Country% Weight  Country% Weight
China31.9% Taiwan23.3%
South Korea12.6% South Korea17.4%
Taiwan11.5% Poland15.0%
India9.7% Chile14.8%
Brazil7.2% South Africa9.0%
South Africa6.2% Philippines6.3%
Russia4.2% Mexico5.8%
Mexico2.8% Indonesia4.0%
Thailand2.4% Thailand3.3%
Malaysia2.2% India1.1%

Sources:, Life + Liberty Indexes. Data as of May 20, 2019.

Inside, A Sector Shake-Up

Without China, FRDM's index performance naturally will deviate from that of other emerging market funds. But it shouldn't stray too far, says Tolle, as high allocations to Taiwan and South Korea—countries whose performance is highly correlated to China—will act as a China proxy for the time being.

"They give us low tracking error to other emerging market benchmarks, but without the China exposure," she said.

On the other hand, FRDM's sector makeup differs significantly from other popular emerging market ETFs, which include SOEs and stocks from commodity-rich nations.

For example, FRDM has nearly twice the allocation to information technology companies as EEM, yet a substantially smaller allocation to industrials, energy firms, and consumer discretionary and staples stocks.


Top 10 Sector Weights, By Percentage
Financials24.06% Information Technology26.59%
Information Technology14.52% Financials24.35%
Consumer Discretionary13.36% Consumer Discretionary12.00%
Communication12.24% Materials9.82%
Energy8.06% Communication Services8.54%
Materials7.33% Energy5.71%
Consumer Staples6.39% Consumer Staples5.69%
Industrials5.35% Industrials2.99%
Real Estate3.14% Real Estate2.16%
Health Care2.64% Healthcare2.14%

Sources: BlackRock, Life + Liberty Indexes. Data as of May 22, 2019.


Eliminating ‘The Worst Actors’

Each January, the Life + Liberty Freedom 100 Emerging Markets Index is rebalanced and reconstituted, meaning FRDM's country mix can and will shift.

For example, Poland once held top weighting in the index; after right-wing extremists assumed power, however, the country fell from first ranking to fourth.

A rebalance may also be triggered after significant geopolitical events. Should a constituent country decline a certain number of percentage points on a "freedom health" scale, that nation is dropped from the index immediately—as was the case in 2018, when President Erdogan's consolidation of power led to Turkey being dropped from the index.

Ultimately, however, some countries with less free markets may still make it into the index. That's because there is no 100% "free" emerging market—just as there aren't any 100% "free" developing markets. The Life + Liberty benchmark simply strives to find the most free countries, and barring that, the least worst options.

"We're not drawing a firm line in the sand," said Tolle. "Instead, we're trying to eliminate the worst actors."

ETF By ‘True Believers’

Unlike many ESG products these days, which have been rushed to market to capitalize on investors' growing consciences, FRDM seems like it has been built by true believers. That's because it was.

Before founding Life + Liberty Indexes, Tolle lived and worked in Beijing, Shanghai and Hong Kong, where she got to see firsthand the difference freedom makes to an economy and the people participating in it.

She translated the lessons learned into the development of the Life + Liberty Freedom 100 Emerging Markets Index, which underpins FRDM.

Believing Is Investing

The ETF represents Alpha Architect's first partnership with a third-party index provider, as well as its first foray into socially responsible investing. The firm already has five other ETFs under its belt, the largest of which is the $92 million Alpha Architect Value Momentum Trend ETF (VMOT).

In FRDM's case, however, the firm is taking a back seat role, essentially acting as a white label ETF provider, while Tolle serves as the "face and the brand" of the ETF, says Gray.

"We're not going to turn into a front-and-center ESG firm," he added. 

Still, Gray admits FRDM speaks to him on a personal level. As a former U.S. Marine, whose firm employs a substantial number of military veterans, Gray was drawn to the concept of freedom weighting as a real-world application of the principles for which he put his life on the line.

"People want to do business with people they believe in," he said. "I don't see the corporate, soulless brand of [a big ETF company] convincing investors that they truly believe in their ESG funds; to them, it's just another product. Given the choice, I think people will want to do business with a boutique firm that really believes in their products." 

Competitive Price, Good Timing

Whether investors actually will believe in FRDM's concept is yet to be seen. But FRDM does have one substantial advantage: its price tag.

The ETF has an expense ratio of 0.49%, well below the cost of the average emerging market ETF, which costs 0.60%. Meanwhile, the average socially responsible ETF costs 0.41%.

Another advantage is one of timing. As major indexers like MSCI increase their Chinese A-shares exposure and add Saudi Arabia to their benchmarks, investors who don't want to invest in these countries are left with few options.

To them, FRDM might just be the right product at the right time.

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for and ETF Report.