VWO - FRDM: The Emerging Market Alpha Is In Liberty

2024-01-05 15:28:21 ET

Summary

• The Freedom 100 Emerging Markets ETF focuses on investing in emerging markets that score well on personal and economic freedoms.
• The FRDM ETF's portfolio is heavily invested in Taiwan, South Korea, and Poland, with top holdings in semiconductors, battery technology, and financial services.
• FRDM stands out from other similar ETFs by excluding China from its portfolio and has performed strongly as a result.

Investing in emerging markets ("EM") has been difficult for well over a decade if you used more traditional proxies like Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) and iShares MSCI Emerging Markets ETF (EEM). It turns out investing in emerging markets successfully has a lot to do with favoring countries that score well on liberty. That's why the Freedom 100 Emerging Markets ETF ( FRDM ) is certainly worth keeping on your radar if you believe emerging markets will begin to really rocket this year.

Launched by Empowered Funds, LLC, FRDM is an exchange-traded fund, or ETF, that tracks the performance of the Freedom 100 Emerging Markets Index. This index is specifically designed to capture the performance of equity securities across various emerging economies. The fund's strategy is systematic, focusing on countries that have demonstrated strong personal and economic freedoms.

A Closer Look at FRDM's Holdings

FRDM's portfolio is a curated collection of stocks from emerging markets, strategically excluding certain countries like China and Saudi Arabia due to their controversial records on personal and economic freedom. The fund is currently heavily invested in three emerging markets – Taiwan, South Korea, and Poland – accounting for almost 60% of its total assets.

The top individual holdings in FRDM's portfolio are renowned firms in the fields of semiconductors, lithium-ion battery technology, financial services, and electronic manufacturing. These include MediaTek Inc., Hon Hai Precision Industry Co., Ltd., SK Hynix Inc., Taiwan Semiconductor Manufacturing Company Limited (TSM), Samsung SDI Co., Ltd., and NAVER Corporation. These six stocks alone account for almost 18% of FRDM’s entire portfolio.

Sector Composition and Weightings

FRDM's investment strategy is highly concentrated in certain sectors. Technology, financials, and basic materials make up over 65% of the fund's total portfolio. The heavy investment in technology can be attributed to the fund's significant holdings in Taiwan and South Korea, countries known for their robust semiconductor and electronics industries.

Furthermore, the significant weightage given to Chile in the fund's portfolio has resulted in a sizeable investment in the basic materials sector. Chile is the world's top copper producer and the second-largest producer of lithium, a mineral in high demand due to the rising popularity of electric vehicles.

Peer Comparison Against Other Similar ETFs

When compared to other similar ETFs such as the iShares MSCI Emerging Markets ETF ((EEM)) and the Vanguard FTSE Emerging Markets Index Fund ETF ((VWO)), FRDM stands out due to its unique investment approach. While EEM and VWO have considerable exposure to Chinese stocks, FRDM completely excludes China from its portfolio. This alone explains how strongly the fund has performed on a relative basis.

Pros and Cons of Investing in FRDM

The primary advantage of investing in FRDM lies in its unique investment approach, which combines financial performance with a country's commitment to personal and economic freedom. This strategy has led to strong total returns and a diversified portfolio that excludes potentially risky markets like China.

However, there are also potential drawbacks to investing in FRDM. The fund's dividend payout has been inconsistent, which may deter income-seeking investors. Additionally, the fund's focus on freedom scores has resulted in significant investments in certain countries and sectors, potentially leading to a lack of diversification.

Conclusion: To Invest or Not to Invest?

The Freedom 100 Emerging Markets ETF represents a unique opportunity for investors looking to tap into high-growth emerging markets while also supporting countries committed to personal and economic freedoms. Its strong performance, combined with its unique investment approach and diversified portfolio, make it an attractive option for investors. If you want to avoid China and put your investment dollars in countries that exhibit higher degrees of relative freedom, there's no better choice.

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