‘Just so full of autocracies’: For the Freedom 100 Emerging Markets ETF, outperformance in 2022 goes beyond nixing China

The Freedom 100 Emerging Markets ETF’s primary strategy of avoiding the “worst offenders” when it comes to economic freedoms appears to be paying off so far this year relative to other emerging-markets funds — even some that exclude China.

The ETF’s exclusion of authoritarian regimes is “a natural result of freedom weighting” that gives the most weight to the freest countries in emerging markets, according to Perth Tolle, founder of Life + Liberty Indexes and creator of the Freedom 100 EM Index. “We believe the freer countries will outperform,” she said. “The worst offenders as far as human rights and economic freedoms are naturally excluded.”

China, Russia and Saudi Arabia are among the countries that have never been in the index tracked by the Freedom 100 Emerging Markets ETF, according to Tolle. It’s “a dynamic process,” with countries having the potential to be included as they become more free, as the index is rebalanced every January, she said. 

Shares of the Freedom 100 Emerging Markets ETF
FRDM
are down 21.2% this year through Wednesday, suffering losses similar to the U.S. stock market’s performance as measured by the S&P 500 index, according to FactSet data. The SPDR S&P 500 ETF Trust
SPY
fell 21.1% over the same period. 

Meanwhile, the iShares MSCI Emerging Markets ETF
EEM
has tumbled a steeper 29.3% in 2022 through Wednesday, FactSet data show. 

“The emerging-market space is just so full of autocracies,” said Tolle. “China is obviously the elephant in the room, being the biggest one.”

After “sustained underperformance” of Chinese equities, “ex-China has become its own category,” she said. “That’s ok, but it’s like a Band-Aid on a cancer.”

Shares of the iShares MSCI Emerging Markets ex China ETF
EMXC
have tumbled 24% this year through Wednesday, while the Columbia EM Core ex-China ETF
XCEM
has sunk 23.1% and the KraneShares MSCI Emerging Markets EX China Index ETF
KEMX
has fallen 25.2%, according to FactSet data.  

Meanwhile, the WisdomTree Emerging Markets Ex-China Fund
XC,
which launched in late September, rose 3% in October. Last month the Freedom 100 Emerging Markets ETF
FRDM
gained 5.2% while the S&P 500 jumped 8%, FactSet data show. 

MarketWatch highlighted the above ETFs that exclude China in last week’s ETF Wrap, citing research firm Strategas’s concerns that Chinese equities were dragging down performance in emerging-markets funds. 

Now read: Emerging-markets ETFs are ‘burning investor cash’ as China drags down performance

But to Tolle’s mind, just cutting China out of funds tracking a market-cap-weighted index “doesn’t make sense.” That’s because removing “the biggest market-cap country” means “you’re actually adding weight to other autocracies.”  

The Freedom 100 Emerging Markets ETF, which launched in May 2019, gave Taiwan the biggest weighting in January after its rebalancing, according to Tolle. Still, Chile’s weighting in the fund rose to an even higher level in 2022 due to outperformance, she said. 

“Chile has really outperformed everyone this year,” said Tolle, explaining that the country’s sectors have benefited from their commodity exposure. 

She said Brazil’s weight in the ETF also rose after outperforming other emerging markets this year. In her view, stock-market investors recently expressed relief that the country’s “fair and free” presidential election was “orderly” even as the outcome of the runoff vote was tight.

Read: Brazil ETF climbs after Lula wins Brazil’s presidential election

The Freedom 100 Emerging Markets ETF had about $240 million in assets under management on Nov. 2, according to its website. Inflows “started jumping when we saw the China crackdown in 2021 on their tech companies, and then it doubled when we saw” the Russia-Ukraine war begin earlier this year, Tolle said. 

The ETF was “created for people who have an allocation to emerging markets,” according to Tolle. “EM is very volatile, so if you’re only used to investing in the U.S. you may not want to go there.”

But currently lower valuations and diversification are reasons some investors may want to do so, she added. Also, emerging markets are “more poised for growth” compared with developed markets.

“We’re just trying to find the next big growth stories” in emerging markets, Tolle said. “We think that freer markets is where we’ll find them.”

Check out: Big World of Investing to see MarketWatch’s Joy Wiltermuth interview Perth Tolle during the Best New Ideas in Money Festival in September.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data. 

The good …

… and the bad

New ETFs

• VanEck said Thursday that it was launching the VanEck Dynamic High Income ETF
  INC,
  an actively managed  ETF that provides diversified exposure across “the highest yielding segments” of the equity-income and fixed-income markets.

• Allianz Investment Management announced Nov. 1 that it has launched the AllianzIM U.S. Large Cap Buffer10 Nov ETF
  NVBT
  and the AllianzIM U.S. Large Cap Buffer20 Nov ETF
  NVBW.
  The ETFs aim to “provide downside risk mitigation through a Buffer against the first 10% and 20% of market losses and offer upside potential by tracking the share price returns of the SPDR S&P 500 ETF Trust up to a stated cap.”

Weekly ETF reads