Freedom 100 Emerging Markets ETF Review | FRDM ETF Review

Emerging Markets have been shunned by many investors from a performance, strategic and political standpoint in recent decades; however, what if there was an alternative to investing in countries such as China and Russia that instead valued personal and economic freedom metrics?

Enter Freedom 100 Emerging Markets ETF (Ticker: FRDM).

This Emerging Markets fund, created by Perth Tolle, has recently celebrated its third birthday as an ETF and has also attracted impressive AUM flows of late.

Given that investors are now increasingly seeking non-financial factors such as Environmental, Social and Governance within their portfolios, an Emerging Markets ETF that keys in on personal and economic freedom, is very much a welcome addition to the marketplace.

But how does a fund that shuns certain countries fit into a portfolio from purely a financial/returns perspective?

Our review of the Freedom 100 Emerging Markets ETF will examine things from both sides of the coin (social vs strategic) to determine whether it has a potential place in your portfolio.

Freedom 100 Emerging Markets ETF Review

Hey guys! Here is the part where I mention I’m merely a travel vlogger! This ETF review is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

FRDM ETF Review

Freedom 100 Emerging Markets ETF Review with an eagle flying freely in the sky overlooking a forest
Source: Pixabay

Travel And Living in Emerging Markets

One advantage I have, from entirely a subjective point of view, is that I have lived and/or travelled to every single one of the top 10 country holdings of the FRDM ETF.

As of May 2022 here are the top 10 country holdings:

Top 10 Country Holdings for FRDM ETF
Source: FreedomETFs.com and AlphaArchitect.com

Top 10 Country Holdings FRDM Index

1) Chile at 20.87%
2) Taiwan at 17.99%
3) South Korea at 15.92%
4) Poland at 10.99%
5) South Africa at 7.98%
6) Brazil at 7.34%
7) Malaysia at 5.54%
8) Indonesia at 4.79%
9) Mexico at 3.08%
10) Thailand at 2.63%

Cape Town sidecar motorcycle tour we did in South Africa on one of two visits to the country
Cape Town sidecar motorcycle tour we did in South Africa on one of two visits to the country

I’ve been to Chile twice. You won’t find a more majestic place to hike than Torres del Paine National Park.

Taiwan is where I’ve tasted the most fascinating street food, at night markets, including but not limited to stinky tofu.

I spent several years teaching English in South Korea and it’s also where I met my wife Audrey.

Poland is where you can easily gain 10 pounds in less than a month devouring pierogi while visiting underrated cities such as Wroclaw.

South Africa is one country I’m most interested in revisiting again in the near future. World-class safari. Underrated wine regions. Coastal areas that rival Ireland.

Brazil is a destination where we have relatives located in Rio. And pão de queijo to keep my waistline ever expanding.

Malaysia might be the most underrated country to visit in SE Asia from a sightseeing and cuisine standpoint. I’m craving Laksa just thinking about it.

Most visitors gravitate towards Bali but I feel exploring other islands in Indonesia really rewards curious travellers.

We’ve only experienced “resort-land” once in Mexico, so we’re itching to see more of the country.

Thailand is the land of smiles for good reason. Chiang Mai was our favourite digital nomad base of all-time.

Thanks for the personal touch and all but what does any of this have to do with investing?

Well, a lot.

I believe strongly in the economic future of all the countries listed here.

Furthermore, this list looks very different than a typical market-cap weighted Emerging Market fund.

FTSE Vanguard Emerging Markets ETF Market Allocation Exposure by Country
Source: Vanguard.ca

Top 10 Country Holdings FTSE Index

1) China at 32.1%
2) Taiwan at 18.4%
3) India at 16.8%
4) Brazil at 6.5%
5) Saudi Arabia at 5.3%
6) South Africa at 4.3%
7) Thailand at 3.0%
8) Mexico at 2.5%
9) Indonesia at 2.1%
10) Malaysia at 2.0%

With China, India and Saudi Arabia accounting for 54.2% of a typical Emerging Markets index fund, one of the clear immediate benefits FRDM ETF offers is a diversified set of countries excluding these ones.

This is an advantage for investors seeking exposure to Emerging markets outside of especially China, India and Russia.

However, it also brings about one of my first points of constructive criticism in the sense that you’re taking some very concentrated bets on some tiny markets.

Consider Chile for instance.

It’s the largest country holding for the Freedom 100 Emerging Markets ETF at 20.87%.

Chile only has a population of 19.12 million people and represents 0.22% of the world economy according to trading economics.

Its smaller in population than California, Texas, Florida and New York State.

Yet it’s the number one country in this fund from an asset allocation standpoint.

I’m all for being contrarian.

In fact, this blog is basically a contrarian investing website but even this might be a bit of a stretch for me to allocate that much of a concentrated bet on a country such as Chile.

What it does instantly is make me consider this ETF as a potential “diversifier” in my Emerging Markets equity sleeve rather than its core holding.

Life + Liberty Freedom 100 Emerging Market Index

Life + Liberty Freedom 100 Emerging Market Index objective and process
Source: FreedomETFs.com and AlphaArchitect.com

The clear objective and transparency process of FRDM is definitely one of its strengths as a fund.

As an index it weights based on freedom and economic metrics.

It scans from a 27 country market universe and ensures a minimum level market capitalization requirement is met.

It then utilizes a freedom weighting index derived from 76 quantitate variables measuring personal and economic freedoms for each given country while excluding companies with more than 20% state ownership.

The top 10 securities from each included country are then market capitalization weighted.

Freedom 100 Emerging Markets Top 10 Security Holdings
Source: FreedomETFs.com and AlphaArchitect.com

Top 10 Security Holdings

1) Samsung Electronics at 7.08%
2) Taiwan Semiconductor Mfg Company Ltd at 6.65%
3) Sociedad Química y Minera de Chile S.A. at 6.23%
4) Vale S.A. at 3.62%
5) Sudamericana Vapor at 3.12%
6) Falabella Sa at 3.08%
7) Bk Central Asia at 2.90%
8) Bank Pekao Sa at 2.73%
9) Mediatek Inc at 2.55%
10) Hon Hai Precision at 2.47%

When I add up the 10 positions of this fund I notice it takes up 40.43% out of 112 positions.

In other words, the other 102 securities account for the remaining 59.57% of FRDM ETF.

The fate of its performance is very much tied to its concentrated top 10 holdings – especially its top 3 positions.

For concentrated funds, that I own in my portfolio, I tend to prefer something closer to equal weighting positions and/or individual company cap-size limitations.

FRDM Factor Exposure

Given this is an equity only review let’s check out the stock style, factor profile and style measures of this fund as screened by Morningstar under the hood.

FRDM ETF asset allocation, stock style, factor profile and style measures
Source: Morningstar.com

Freedom 100 Emerging Markets ETF is very much a mega/large cap centric fund with a bullseye landing in the blend column with a slight growth tilt.

In terms of Style measures the fund offers a highly attractive P/E of 8.25 versus its category average of 11.08

Its dividend yield of 5.83% and Historical Earnings of 59% also really jump out versus its category benchmark.

In terms of FRDM ETF’s factor profile it has decent exposure to both yield and low volatility which are attractive defensive equity factors.

For those seeking multi-factor exposure to “historic return drivers” of size, momentum, quality and value FRDM ETF falls short in that regard.

I’d love to see this fund, given its concentrated size of 112 positions, offer more of an attractive factor profile.

As an example, an Emerging Markets fund such as FEMS, with 205 positions has pulled hard on the levers of multi-factor exposure in terms of value, yield, momentum, quality and size.

FEMS Alphadex multi-factor profile and style measure
Source: Morningstar.com

If FRDM offered a further screening process for factors, in addition to market-cap weighting, it would instantly become more attractive to me as a factor thirsty investor.

However, for those comfortable with more vanilla market-cap weighting factor profiles this may not be as much of an issue.

I do love that FRDM offers large-cap established companies with defensive low volatility and yield characteristics given that Emerging Markets (and especially more concentrated funds) tend to be more volatile than developed markets equities.

FRDM Sector and Country Exposure

Let’s check out sector exposure and country exposure for Freedom 100 Emerging Markets ETF.

FRDM ETF Sector Exposure vs its benchmark
Source: Morningstar

In terms of sector exposure FRDM spreads out nicely and is quite compositionally similar to its EM benchmark standard.

One noticeable exception is in terms of Basic Materials which is approximately 20.43% of the fund versus its benchmark of 7.37% with less consumer cyclical, consumer defensive and real estate exposure.

FRDM Country Exposure versus Category Exposure
Source: Morningstar.com

I’ve covered the funds country exposure earlier in the article but I’d like to briefly touch upon its outsized exposure to Chile (25% vs 0.44%) and Poland (9.25% vs 0.46%) in particular while also highlighting that countries such as Mexico, Brazil and Taiwan are nearly identical in weightings to classic EM configurations.

You’re definitely getting something different with this Emerging market fund, in terms of its country weightings, whether you view that as a pro or con.

FRDM ETF Performance

Since I’ve mentioned both Emerging Markets market-cap weighted FTSE index and concentrated factor-focused FEMS, I thought I’d compare FRDM with them directly.

Keep in mind FRDM is only 3 years old so this backtest is limited in terms of a long-term direct comparison.

Freedom 100 Emerging Markets ETF FRDM versus other EM funds performance portfolio returns since inception
Source: PortfolioVisualizer.com

What immediately jumps out as a feather in Freedom 100 Emerging Markets ETF’s cap is that it has clearly outperformed its benchmark since inception.

With a 6.05% CAGR it is confidently ahead of Vanguard FTSE Emerging Markets All Cap Index which returned 2.27% CAGR.

However, against multi-factor stalwart FEMS it hasn’t performed as well against its 8.29% CAGR.

Keep in mind for both of the concentrated funds (FRDM and FEMS) have considerably more frightening drawdowns of more than -30% versus all country EM FTSE which was -18%.

Concentrated funds are more of a rollercoaster ride, both in terms of highs and lows, and savvy investors in these types of funds need to be mentally prepared for that.

FRDM ETF Pros and Cons

Pros and Cons
Source: Pixabay

Pros

  1. Tremendous branding stroke of genius with personal and economic freedom metrics as the backbone of the fund
  2. An opportunity to support and add diversification to your portfolio with Emerging markets exposure while not supporting current “freedom inhibiting” regimes such as China and Russia
  3. Outsized exposure to countries such as Chile and Poland which are typically afterthoughts in a market-cap weighted portfolio
  4. Factor exposure to low-volatility and yield which are defensive in nature and help manage volatility in a more concentrated fund such as FRDM
  5. Attracting investors to Emerging Markets that have been idealistically opposed to investing in certain countries for a variety of personal/political reasons
  6. A very reasonable and attractive 0.49% MER
  7. Opportunity to support boutique level ideas and creativity rather than merely hand over money freely to the Goliaths of the industry

Cons

  1. Its top 10 positions take up over 40% of the fund meaning its fate is pretty much directly tied to these concentrated bets
  2. Massively outsized exposure to countries such as Chile and Poland which indirectly give “elsewhere home country” bias outside of “your home country” (assuming you’re a US investor)
  3. For a concentrated fund the factor profile of not having exposure to value, size, momentum and quality limits the potential returns of the fund long-term from a quant perspective
  4. Hardcore low-cost fee indexers, such as the Bogleheads, may have a hard-time ponying up a bit more to cover management fees


Source: YouTube from Value After Hours Channel

Core Holding Solution

Could FRDM ETF be your total Emerging Markets portfolio solution in that part of your equity sleeve?

Possibly.

In order to justify the Freedom 100 Emerging Markets ETF as your sole EM fund in your portfolio, it requires a large degree of faith in your conviction of wanting to support countries with higher relative economic and personal freedoms.

Strategically speaking, with 40%+ of the fund being concentrated in only 10 positions, you’re likely in for a bumpy ride in emerging markets that are more volatile historically than developed countries.

For those with a strong conviction towards global investing and EM exposure a potential core holding for FRDM in a 60/40 portfolio might look like this:

60/40 Portfolio

30% US Equities
20% Int-Dev Equities (ex-USA)
10% FRDM (Emerging Market)
40% Aggregate Bond Index

Partial Portfolio Solution

I think FRDM, as an Emerging Market ETF, really thrives as a partial portfolio solution for those investing in Emerging Markets as part of a globally diversified portfolio.

Given that FRDM ETF is providing market-cap weighted exposure I’ll suggest two other funds with quant strategies to help drive returns.

10% Emerging Markets Sleeve

3.33% FRDM
3.33% FEM
3.33% FEMS

The combination of these funds provides market-cap weighted strategies with a growth tilt in tandem with multi-factor tilted EM funds that provide exposure to size, value, momentum, quality and yield.

Nomadic Samuel traveling in Argentina (an Emerging Market destination) by horseback with gauchos
Nomadic Samuel traveling in Argentina (an Emerging Market destination) by horseback with gauchos

Nomadic Samuel Final Thoughts

Freedom 100 Emerging Markets ETF represents one of the most interesting funds in the marketplace today.

As a fund that has attracted over 217.58 million AUM there is definitely a desire from investors for personal and economic freedom ETFs.

That’s terrific.

Moreover, it’s amazing to see boutique level creativity thrive given that giants in the industry such as the Vanguards and iShares gobble up most of assets under management.

Thus, I have a lot of respect for Perth Tolle for coming up with such an important product in terms of its potential impact beyond just finance and investment strategy.

The fund however does have some flaws that I’ve already pointed out clearly (position size concentration, overexposure to certain countries relative to their economic footprint and not as strong of a factor profile as I’d expect with only 112 positions).

I do like this fund on a personal level more than I do from a quant perspective.

That for me makes it a possible “diversifier” in my Emerging markets equity sleeve allocation as opposed to my primary holding.

I’m a big believer in Emerging Markets from a personal point of view (travel and living in these countries) and I also confidently invest globally as part of a diversified investing strategy.

I have mixed feelings about this fund (personally versus strategically) but I’m certainly glad it exists and I ultimately wish it the best of luck and hope it continues to succeed.

What do you think?

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