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ETF to Depict Freedom Of an Emerging Economy in the Making

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Sustainable investing has been evolving slowly. As many as 75% of U.S. asset managers in a new survey indicated that their firms have implemented sustainable investing, up from 65% in 2016 (read: Vanguard Jumps on the ESG ETF Bandwagon).

About two-third of asset managers expect the concept to continue to grow over the next five years. Around $12 trillion or one-quarter of U.S. assets under professional management currently deploy sustainability principles, according to recent research.

Apart from the social standpoint, this investing practice offers substantial gains to investors. This is because lesser focus on environmental issues by companies may result in lawsuits, fines and damages, per the source. About 82% of respondents of a recent survey said that robust environmental, social and governance (ESG) practices could boost profitability.

Probably this is why, Alpha Architect recently filed for an ESG ETF, which is the first for the firm’s portfolio. The name of the fund is Alpha Architect Freedom 100 Emerging Markets ETF FRDM.

Inside FRDM

The fund will look for stocks from economies where governments treat their citizens better. These economies are likely to be stronger performer and are likely to offer greater corporate returns.

FRDM's benchmark will be the Life + Liberty Freedom 100 Emerging Markets Index. The index would comprise roughly 100 equity securities listed in emerging markets countries with a high "freedom" score. This score is calculated by 79 personal and economic criteria that measure a country's ability to “guarantee its citizens' rights to life, liberty and property. It is derived using data from governments, non-governmental organizations like the World Bank, private sector firms and others,” per an article published on etf.com.

Only 10 countries get a place in the final index, namely, Taiwan, South Korea, Chile, Poland, South Africa, Philippines, Mexico, Indonesia, Thailand and India. Investors should note that state-owned enterprises are kept away from the index (read: Emerging Markets Most Crowded Trade Ever: 5 Hottest ETFs).

How Does It Fit In a Portfolio?

Studies have revealed that countries with more economic freedom significantly beat those with less freedom, not only in terms of GDP but also in “per capita incomes, health care, education, protection of the environment, and reduction of poverty,” per an article published on Forbes.

A report released in 2014, freedom investing outdid EAFE index by 3.92% annualized over the past decade.  In 2016, the average return of the best investment products of the Freedom Six (Hong Kong, Singapore, Australia, Switzerland, New Zealand, and Canada) surpassed the Vanguard FTSE Developed Markets ETF by 6.75%, per Forbes.

The Forbes article went on to explain the importance of freedom investing by comparing investing in South Korea with North Korea. Dictatorship in North Korea does not give enough access to investments, unlike South Korea.

Competition

The concept of economic freedom on the emerging market level looks to be pretty fresh. From that context, the fund should not face any trouble in amassing investors’ assets. However, there are emerging market-based ESG ETFs available in the market, namely iShares ESG MSCI EM ETF (ESGE - Free Report) , Nuveen ESG Emerging Markets Equity ETF (NUEM - Free Report) and Xtrackers MSCI EMs ESG Leaders Equity ETF (EMSG - Free Report) . These funds may pose threat to the new entrant.

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