The Freedom 100 Emerging Markets ETF (FRDM) is an exchange-traded fund (ETF) which strives to invest in the more free Emerging Market countries for an expense ratio of 0.49%. While this expense ratio is lower than average, it is near the upper limit of funds we will consider for our Buy List. Empowered Funds, LLC serves as the investment adviser of the Fund and Mr. Brandon Koepke has been the portfolio manager for the Fund and has managed the Fund since June 2020.

This fund is similar to our strategy of Freedom Investing, except that it is focused on civil and political freedom in addition to economic freedom. Because a society which displays freedom in one measure is usually free in other measures, this difference is likely negligible. Economic freedom is often associated with civil and political freedom as well.

The fund company uses data from the Fraser Institute and Cato Institute to create the freedom scores across three categories:

The Freedom ETF (FRDM) excludes markets with the worst human rights records which otherwise may have over-concentrations in other commonly used Emerging Markets strategies. It also excludes companies with 20% or more state ownership. It provides an option with freer country exposures and allocates higher weights to freer markets without avoiding unfree countries entirely.

The expense ratio of FRDM is 0.49%, which is higher than we would like. By contrast, our current emerging market country exposure includes these investments:

• iShares MSCI Chile ETF (ECH) with an expense ratio of 0.57%
• Franklin FTSE Taiwan ETF (FLTW) with an expense ratio of 0.19%
• Franklin FTSE South Korea ETF (FLKR) with an expense ratio of 0.09%

An equal investment in the three country specific funds would have an average expense ratio of 0.28%. This is a potential client savings of $25,000 annually on an investment of $12 million dollars.

Additionally, our emerging markets fund, Vanguard FTSE Emerging Markets ETF (VWO), has an expense ratio of just 0.08%. Using these three country specific funds plus a low cost Vanguard Emerging Market fund allows us to emphasize these countries for as low a cost as possible.

In our Schwab Institutional Intelligent Portfolios (IIP) offering, Schwab limits our fund selections for each of their security type categories (Stocks, Fixed Income, and Commodities) to only twenty different funds. As a result of this limitation, in IIP accounts we use the Freedom ETF (FRDM) to emphasize these three countries with a single fund. This allows two additional slots for additional diversification.

For non-taxable accounts, the algorithm-traded IIP accounts implement the dynamic tilt as quickly as possible. This and the fact that Schwab automatically generates sell orders to cover any withdrawals are the two main benefits of the IIP program.

A year or so ago, we opened up our Do-It-Yourself service level to regular accounts which are hand-traded by our investing team. Hand trading has several advantages. It is often better for taxable accounts as capital gains management is handled wisely by skilled traders but poorly by algorithm. Furthermore unlike the Schwab IIP accounts, our hand-traded accounts do not require a 4% allocation to cash. Assuming a 7% rate of return, a 4% allocation to cash could reduce performance by as much as 0.28% simply because the account is not fully invested. Hand-traded accounts also have access to our full buy list, including all of the less expensive freedom investing countries.

If you want to open a Schwab account to be hand-traded by Marotta, you can follow our Form and Guides to open an account at Schwab and add our management to the account. If you want to open a “Do-It-Yourself” account on the Schwab Institutional Intelligent Portfolios (IIP) platform, you can follow these instructions.

Photo of Taiwan by Timo Volz on Unsplash