I recently learned of an interesting investment that is based on the strong correlation between economic freedom and income per capital. The analysis comes from the Fraser Institute and it shows that those in the freest quartile of countries earn, on average, 6.2 times as much as those in the least free quartile of countries.
The investment is Freedom 100 Emerging Markets ETF (FRDM) and it invests in companies in emerging markets that have passed its criteria for civil, political, and economic freedoms. Further, companies with 20% or more state ownership are excluded.
The thinking starts with the fact that emerging markets typically trade at a discount to American stocks, which suggests there are some good stocks that are underpriced. Which emerging markets will likely do best? According to the Fraser Institute’s analysis, the emerging markets that have more economic freedom are more likely to rise up the per-capita earning scale.
The net result is that FRDM overweights the freest emerging market countries, such as Chile and Poland, and excludes the least free countries, such as China and Saudi Arabia.
The expense ratio is 0.49%, which a little high, but still acceptable.
Of course, past performance is no predictor of future returns, but the five-year average annual return has been 19.4%.
Whether people use the results from the Fraser study to drive their investments or not, they should use them to drive their political views. In countries with more economic freedom:
GDP per person is substantially higher. Those in the top quartile countries have incomes that are 6.2 times those in the bottom quartile countries.
Poor people do much better. Poor people in the top quartile countries have incomes that are 7.8 times those of poor people in the bottom quartile countries.
The poverty rate is much lower. The poverty rate among people in the top quartile countries is 4% the poverty rate among people in the bottom quartile countries.
People in countries with more economic freedom work fewer hours.
The life expectancy among people living is countries with more economic freedom is higher. The difference between the top and bottom quartile countries is 17 years.
The infant mortality rate among people living is countries with more economic freedom is much lower.
The life satisfaction and personal freedom scores enjoyed by people living is countries with more economic freedom are substantially greater.
The Environmental Performance Index scores of countries with more economic freedom are higher.
Corruption is lower in countries with more economic freedom.
But, to quote Monty Python in Life of Brian:
All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?
Economic freedom is clearly beneficial to citizens. It’s so obvious that it often skips our attention. The Freedom 100 Emerging Markets ETF is attempting to channel awareness of that benefit into financial returns for investors. I made a small investment. I’ll probably increase my holding over time as I become more comfortable with the ETF.
A little more research. The investment company was founded in 2014 by Perth Tolle & this is the only ETF that this firm offers. Morningstar likes it. The large return has been in the last two years. The ETF has around $3.6B AUM, & paid a 2.3% dividend.
Their main page is: https://freedometfs.com/frdm/ . The "Presentation" gives their philosophy.
Interesting pick. In the last five years it has been much less volatile than Vanguard's emerging markets ETF (VWO). The FRDM prospectus notes that the ETF rebalances yearly according to the weights imposed by the country freedom status. The rebalancing may have reduced the volatility. Whether this is a good time to invest, is another consideration. I will watch it, too.