Episode Summary
Executive Summary: The episode follows Perth Toll, founder of the Freedom 100 Emerging Markets ETF, as she explains why she built a freedom-weighted emerging markets index that excludes countries with poor human and economic freedom scores, especially China. The conversation blends investment methodology, personal history in China, and the challenges of launching an indie ETF in a competitive market.
Main Topics: Freedom-weighted emerging markets methodology (Priority: 5/5): Toll explains the index design: countries with higher freedom scores receive larger weights, while the least free are excluded. The approach aims to align portfolios with human-rights and governance concerns while maintaining broad EM exposure. Why China is excluded (Priority: 5/5): China is excluded because of low human freedom scores, despite improvements in economic openness over decades. Toll argues that investors in traditional EM funds take on concentrated China exposure without fully recognizing the geopolitical and rights-related risks. Personal experience shaping the thesis (Priority: 5/5): Toll describes growing up between China and the U.S., witnessing censorship, the one-child policy, and the absence of formal records for a friend born under restrictive family-planning rules. These experiences underpin her conviction that freedom affects markets and lives. ETF launch as an indie underdog story (Priority: 4/5): The hosts emphasize the difficulty of competing against large ETF issuers. Toll discusses building the fund through relationships, early believers, and a differentiated concept rather than scale or price leadership. Evidence and backtesting (Priority: 4/5): Toll says the fund tracks MSCI closely in backtests and shows slight alpha over five years. She argues freer countries recover faster and deploy capital more efficiently, creating a structural advantage over time. Distribution, partnerships, and community support (Priority: 3/5): The discussion highlights how Toll secured support from investors and industry figures such as Rob Arnott and Wes Gray, and how conference networking helped transform an idea into a live product.
Key Arguments: Traditional EM funds are overly concentrated in China, often allocating about 30-35% to one country, which creates geopolitical and concentration risk. A freedom-weighted methodology better reflects long-term sustainability by favoring countries with stronger human and economic freedoms. Excluding countries with poor civil, political, and property rights is a values-based choice and also a potential source of alpha over time. Freedom scores from third-party datasets make the index objective and difficult to game. Backtests suggest the strategy tracks the MSCI benchmark closely while providing slight excess return over five years. The ETF industry is hostile to small issuers, so indie products must rely on differentiation, relationships, and a compelling story rather than low fees alone. Toll believes many investors seek emerging markets exposure without fully understanding the human-rights and governance realities embedded in market-cap benchmarks.
Data Points: China weight in major EM indexes: 30-35% - Toll says MSCI, FTSE, and S&P emerging markets indexes generally allocate this much to China. China weight in VWO: 31% - Used as the example of a large cap-weighted EM ETF with heavy China exposure. Potential China weight in benchmark after A-share inclusion: Could be 40% - Toll argues benchmark China exposure may rise further as A-shares are added. Number of variables in freedom score: 79 - The index uses a combined third-party freedom framework based on human and economic freedom measures. Backtest horizon: 5 years - Toll says the strategy showed slight alpha over a five-year backtest. Largest current weights in the fund: Taiwan, South Korea, Chile, Poland - These freer emerging markets receive the highest allocations. Excluded countries mentioned: China, Russia, Egypt, Saudi Arabia - Examples of countries excluded due to low freedom scores. Fund ticker: FRDM - Ticker chosen for both the index and the ETF.
Pivotal Quotes: "I didn’t want my investment dollars to be allocated that way." — Perth Toll: Explaining why she created a freedom-weighted methodology after reflecting on China and authoritarian regimes. "It’s basically a freedom-weighted and filtered version of the emerging markets." — Eric Balchunas: Introducing the core concept of the ETF before Toll explains the methodology in detail. "I’m not rooting for China to fail. And this is not an ex-China fund." — Perth Toll: Clarifying that the strategy is values-based and freedom-based rather than an anti-China bet.
Implications: The episode shows how values-based indexing can create differentiated EM exposure, especially for investors uneasy with heavy China concentration. It also highlights that indie ETFs can succeed through strong narratives, objective screens, and network-building.
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