Episode Summary
Executive Summary: The conversation centers on Perth Toll’s Freedom 100 Emerging Markets ETF (FRDM), which uses third-party freedom metrics to weight countries by personal and economic liberty rather than market cap. Toll argues this screens out autocracies, reduces geopolitical risk, and aligns capital with freer, more sustainable economies. The discussion also covers ETF structure, rebalancing, China/Russia exclusions, investor response, and the broader case that governance and freedom materially affect returns.
Main Topics: Freedom-based EM indexing: Toll explains how Life and Liberty Indexes use Cato and Fraser data to rank countries by personal and economic freedom, then apply those scores to emerging-market country weights. Why FRDM excludes autocracies: The strategy naturally avoids China, Russia, Saudi Arabia, and Turkey because low freedom scores and liquidity screens remove them from the portfolio, reducing exposure to politically risky regimes. ETF construction and mechanics: The index starts with MSCI-style EM countries, removes illiquid/small markets, then holds the top 10 liquid non-state-owned companies in each included country; it rebalances annually. Performance and investor demand: Toll and Barry discuss the fund’s strong performance, Morningstar five-star rating, roughly $200 million in assets, and growing institutional adoption. China, Russia, and governance risk: The interview uses China and Russia as examples of how expropriation, weak rule of law, and political repression damage long-term market outcomes and investor protections. Freedom, development, and frontier markets: Toll argues freer countries tend to have higher GDP growth, better social outcomes, and stronger capital efficiency, and she sees potential for a future frontier-markets version of the strategy. Career, mentors, and creative finance: In the closing section, Toll discusses mentors, learning at Fidelity, the value of failure, and her view that indexing can be a creative form of expression.
Key Arguments: Freedom metrics are a better way to allocate in emerging markets because cap-weighted indexes overweight autocracies and state-influenced companies. Using independent, quantitative think-tank data reduces subjectivity and makes the strategy rules-based and transparent. Liquidity and tradability matter: even very free but tiny markets are excluded if they are not practical ETF holdings. Annual rebalancing is appropriate because freedom changes slowly upward and can deteriorate quickly downward. China’s crackdowns on tech, Hong Kong’s national security law, and Russia’s rule-of-law failures show why governance matters to investors. Freer countries generally have better macro and social outcomes, including higher growth, lower poverty, and stronger protections for property and investors. The strategy is not an arbitrary anti-China or anti-Russia bet; exclusions follow mechanically from the freedom scores. Wall Street-style EM groupings like BRICS can obscure political and governance differences and even be used by autocratic regimes as signaling devices. Investing in unfree regimes can subsidize repression and expropriation, while freer markets provide a more sustainable base for capital formation.
Data Points: Emerging markets country universe: 27 countries - Initial MSCI-style EM universe used before liquidity and freedom screens Freedom metrics coverage: 165 countries across 79 metrics - Cato/Fraser human freedom data set used to rank countries Eligible universe after liquidity screen: About 18 countries - Countries large and tradable enough for ETF inclusion Included countries after freedom weighting: Typically 10–11 countries - Final country set selected by the rules-based algorithm Portfolio holdings: 110 securities - Current ETF composition mentioned in the interview Historic holdings count: 100 securities in 10 countries - Earlier composition when the ETF was called Freedom 100 Fund assets: About $200 million - Assets under management at the time of the interview Fund age: Three years old - Described as newly reaching Morningstar’s three-year track record threshold Morningstar rating: Five stars - Recent Morningstar ranking for the fund Country freedom score: Russia: 6.23/10 - Below included-borderline markets such as Kuwait and India Country freedom score: Kuwait: 6.34/10 - Borderline emerging-market comparison point Country freedom score: India: 6.39/10 - Borderline EM market, sometimes included depending on score Country freedom score: Philippines: 6.83/10 - Example of an included borderline country Country freedom score: Thailand: 6.89/10 - Example of an included borderline country Country freedom score: Saudi Arabia: 5.12/10 - One of the lowest-ranked EM countries discussed Country freedom score: China: 5.57/10 - Low score and excluded from the index Country rank: Saudi Arabia: 155th of 162 - Overall world ranking cited in discussion Country rank: China: 150th of 162 - Overall world ranking cited in discussion Country rank: Estonia: Around 5th - Example of a very free, small market
Pivotal Quotes: "we wanted to solve that problem of these autocracy-heavy concentrations in the emerging markets space" — Perth Toll: Explaining the core rationale for freedom-weighted EM investing "We are subsidizing that cost by investing in these places, in these companies." — Perth Toll: Arguing that capital directed to unfree regimes helps finance repression and weak governance "you can't compare obnoxious tweets trashing a company with actual government policies that force companies to pay a corrupt tax" — Barry Ritholtz: Contrasting U.S. political noise with more severe state intervention in China
Implications: The interview frames freedom as an investable factor, not just a moral preference. For investors, it suggests EM exposure can be redesigned to lower geopolitical and governance risk while still capturing growth.
From the Episode
And the reason why we didn't add factors to that is because we wanted to isolate the freedom factor for this product. It's our first ETF, it's the first emerging markets ETF in the world that uses freedom weighting. And so we wanted to see if there was a market for this type of product and see how it would go. And we're very happy with the results. Yeah, so you end up with 100 to 110 companies, more or less, and that's what's in the ETF? Yes. So currently there are 11 countries and there's 110 securities in the ETF. Two years, there have been 100 securities and 10 countries. That's why it was called the Freedom 100. And the index has been outperforming pretty dramatically over the past couple of years, in part because China seemed to have imploded itself, going after their own senior tech people. We'll talk about that later. And obviously, Russia was just a debacle. You sidestepped all of those because none of those countries are in the index. Yes, and again, we don't arbitrarily exclude China or Russia.
Business that way. And we are subsidizing that cost by investing in these places, in these companies. And also, these companies typically have very poor accounting standards, very poor transparency. We don't know who the actual owners are. And so you could directly be enriching autocrats and their cronies because we don't know the ownership of a lot of these companies. As long as the regulators are getting their little payoff on the side, what do they care if the accounting is right? As long as their numbers are. And we have ourselves to blame for that. It's our regulators that allowed this, our lawyers who wanted to make money from this, our investment bankers, and our, you know, Wall Street, us. So we have a lot to be responsible for here. And I think sometimes Wall Street, you know, carelessly makes these things up like bricks. Okay, what is that? You know, it doesn't make any sense. And I think, you know, now people are realizing that, and it's pretty much dead as a grouping in emerging markets investing at least. But now we still have the BRICS Summit in Iran.
Them. And they said, Well, how is what China is doing to their tech sector any different than what Trump did after he got elected? And I always find it weird when I'm in a position of having to defend President Trump. It's like, hey, you can't compare obnoxious tweets trashing a company with actual government policies that force companies to pay a corrupt tax, have people added to their boards by force. Disregard the rule of law, sanctity of contracts, sanctity of private property. As crazy as the Trump era was, it was a lot of noise, at least until January 6th. But I mean, during the Trump administration, it was more noise than actual policies such as we've seen in China. Yeah, I think there's a few differences there. Now, first, I don't know who you're talking about, actually, but I want to say they have a point in that every country has these issues.
About Masters in Business
Barry Ritholtz speaks with the people that shape markets, investing and business.