Advisors and clients alike are right to feel a certain type of way about emerging markets stocks and funds with that way being “if it's not one, it's another.”
More to the point, if it's not one country, it's another. Last year, it was China's regulatory crackdown on consumer internet and online companies that punished emerging markets equities. This year, it's Russia's recent invasion of Ukraine. That's frustrating because even prior to the rapid erosion in Russian equities, the country was a scant percentage of major emerging markets benchmarks, such as the MSCI Emerging Markets Index.
In fact, things are getting so bad in Russian financial markets that MSCI is consulting with clients on th possibility of booting Russians stocks from the provider’s indexes.
“It would be not make a lot of sense for us to continue to include Russian securities if our clients and investors cannot transact in the market,” Dimitris Melas, MSCI’s head of index research and chair of the Index Policy Committee, said in an interview with Reuters.
Fortunately, there are options for clients that want emerging markets exposure with fewer headaches. Enter the Freedom 100 Emerging Markets ETF (CBOE:FRDM).
FRDM Proves Freedom Matters
FRDM is nearly three years old and it has over $122 million in assets under management, making it large enough for many registered investment advisors to access.
With FRDM, freedom isn't a marketing gimmick. The fund tracks the Life + Liberty Freedom 100 Emerging Markets Index, which is a “a freedom-weighted emerging markets equity strategy using personal and economic freedom metrics as primary factors in its investment selection process,” according to the index issuer.
The selection universe starts with 26 developing economies. After filtering for market capitalization, 76 variables are plugged in to assess the economic and personal freedoms of people in those countries. State-owned enterprises are excluded from the index and the fund, which is meaningful for clients because, in emerging markets, those stocks have well-documented histories of lagging.
“The top 10 securities in each included country which meet minimum liquidity requirements are market capitalization weighted within their country weights,” according to the issuer.
For advisors that want to easily convey the advantages of FRDM and the fund's relevance today, try this messaging on for size: FRDM holds no Chinese stocks nor does it have exposure to Russian equities.
Eighty FRDM holdings also reside in the MSCI Emerging Markets Index, but the overlap by weight between the freedom-weighted ETF and the emerging markets benchmark is just 15%, according to ETF Research Center data.
By excluding Chinese and Russian stocks, among others, FRDM is more heavily allocated to higher quality, lower volatility markets. As just two examples, tech-heavy Taiwan and South Korea combined for over 48% of FRDM's geographic exposure at the end of last year.
The difference is tangible. Over the past year, FRDM is down just 3.42% while the MSCI Emerging Markets Index is off 15.6%. Let freedom ring, indeed.