Team America

Speedread: A new emerging markets freedom ETF is hitting US exchanges, with an investment thesis that looks like something out of the 2004 movie Team America: World Police.

USA

Alpha Architect lists emerging markets “freedom” ETF

Pennsylvania-based Alpha Architect is listing an emerging markets ESG ETF that invests in countries based on how free they’re judged to be.

The Alpha Architect Freedom 100 Emerging Markets ETF (FRDM) will track an index from Life + Liberty Indexes. The index, called the Life + Liberty Freedom 100 Emerging Markets Index, invests in 100 EM large caps. It starts by applying an ESG screen on the country level rather than on the company level.

This involves taking data on how well each EM country does protecting citizens rights to life, liberty and property. Countries that are judged to be “more free” are given more weight in the index, while countries judged to be less free are removed or given less weight. 

While the index starts with 26 EM countries, but only 10 make the final cut. At the time of writing these 10 are: Taiwan, South Korea, Chile, Poland, South Africa, Philippines, Mexico, Indonesia, Thailand and India.

Also read: China’s ETF market sees spike in closures.

State owned enterprises are excluded. China is not included in the index. At the time of writing the top companies in the index are:

TickerNameCountry of IncorporationCurrencyWeight
TSMTAIWAN SEMICONDUCTOR MNFTG ADR 5 ORDTWUSD12.22%
005930SAMSUNG ELECTR ORDKRKRW9.44%
NPNNASPERS N ORDZAZAC3.66%
SPLSANTANDER BANK POLSKA ORDPLPLN3.34%
PEOBANK PEKAO ORDPLPLN2.47%
FALABELLASACI FALABELLA ORDCLCLP2.40%
2317HON HAI IND ORDTWTWD2.14%
CHILEBANCO DE CHILE ORDCLCLP2.06%
COPECEMPRESAS COPEC ORDCLCLP2.06%

Analysis – Life + Liberty lives the dream

The index this fund tracks was in circulation for a while before getting picked up by Alpha Architect. Life + Liberty’s boss, Perth Tolle, appeared on Bloomberg some months back saying she was looking for an ETF provider to track her IP. To judge by today’s listing her efforts have succeeded. 

Power to Ms Tolle, too. Indexing can be a brilliant business. Starting an index provider is less capital intensive than starting an ETF provider. So the dream for any index provider is always that an ETF provider comes along and tracks your index, and gives you a basis point share of the assets the fund collects.

In this way, index providers can participate in the upsides of being an asset manager (compounding fees) without having to incur any of the heavy distribution, compliance, legal, product, and capital markets costs. Hence the business model can be so brilliant. 

There was a time some years back when index houses simply took this arrangement for granted. The big three of MSCI, FTSE Russell and S&P Global fancied themselves as holding the whipping hand over ETF providers. They would demand several basis points for the rights to track their indexes. They would refuse to give exclusivity – and all the rest.

Related: State Street’s tough new approach to indexing

But the big index providers learnt gratitude the hard way in 2012, when Vanguard fired MSCI from $170 billion worth of index fund mandates, after MSCI refused to sufficiently lower its fees. The divorce cost MSCI tens of millions in revenue, and its share price cratered 27% the day after the announcement. Meanwhile Vanguard went from strength to strength and saw zero outflows as a result.

In today’s listing however we have a happy instance of a small independent index provider’s product coming to market on fair commercial terms with a smaller independent ETF provider. It’s a good thing too and might show the way forward.