The Great Emerging Markets Debate

Episode Summary

Executive Summary: Live from Bloomberg’s ETF conference in Miami, this Trillions episode centered on a spirited emerging-markets debate between WisdomTree’s Jeremy Schwartz and Life + Liberty Indexes’ Perth Tolle. The discussion contrasted valuation-and-growth arguments for owning EM, including China and Russia, against a governance/freedom framework that excludes autocracies and favors freer markets as safer, more durable investments.

Main Topics: Why invest in emerging markets at all? (Priority: 5/5): Jeremy argued EM offers cheaper valuations and faster growth than U.S. markets, while Perth framed EM as a place to seek safer havens with stronger institutions and rule of law. China as the core EM dilemma (Priority: 5/5): The biggest point of contention was whether China belongs in EM portfolios. Jeremy defended exposure as a valuation/growth opportunity and noted index migration toward A-shares/Hong Kong; Perth argued China’s governance, data transparency, and policy risk make it fundamentally uninvestable. Russia and autocracy risk (Priority: 4/5): Russia served as a parallel case study for political risk. Perth said autocracies should be excluded outright; Jeremy said index removal is symbolic when stocks are already untradeable or marked near zero. Freedom as an investment factor (Priority: 5/5): Perth positioned FRDM as a country-level governance strategy that aligns values and may also outperform because freer markets allocate capital more efficiently and recover faster. Value, dividends, and EM factor tilts (Priority: 4/5): Jeremy highlighted WisdomTree’s value/dividend-heavy EM products, especially small-cap EM and dividend strategies, as beneficiaries of the current growth/value rotation. ETF product growth and issuer storytelling (Priority: 3/5): The conversation also covered how niche ETF ideas gain traction, with Perth describing retail-led growth for FRDM and Jeremy reflecting on product cycles like Japan-hedged and Europe-hedged ETFs. Audience Q&A: currency hedging and Bitcoin ETFs (Priority: 3/5): Questions from attendees explored whether EM exposure is about currencies or equities, and what’s next for spot Bitcoin ETFs and issuer competition.

Key Arguments: Broad EM is attractive because it is cheaper than U.S. equities and may offer faster earnings and sales growth, especially in value-oriented segments. Perth argued that country-level governance is the foundation for investment safety in EM; autocracies introduce too much policy, legal, and data risk. China should not be treated like a normal market because government control, data opacity, and abrupt policy shifts can destroy shareholder value overnight. Jeremy countered that China’s valuations and growth rates can still create opportunity, and that going from a 30%-plus China benchmark weight to zero is a big leap. Perth said China’s freedom metrics rank worse than Russia, and that broad EM indices can carry substantial exposure to autocracies if left market-cap weighted. WisdomTree has responded to China risk by increasing A-share exposure and shifting away from U.S.-listed ADRs toward Hong Kong listings. Russia illustrates the difference between economic and symbolic index decisions: stocks may already be effectively zero or untradeable, making deletion mostly a statement. FRDM’s thesis is that freer countries not only match investor values but can also outperform because they recover faster, use capital more efficiently, and reduce capital flight. In developed markets, currency hedging can be attractive due to positive carry for U.S. investors; in EM, hedging is more expensive and must be tactical. The ETF industry rewards clear narratives: products often gather assets when performance and a timely story align, but those cycles can reverse sharply.

Data Points: Conference location: Miami ETF conference (Exchange) - The episode was recorded live from the ETF conference in Miami. FRDM assets: $44 million to $200 million - Perth described FRDM’s growth from roughly $44M a year earlier to $200M. FRDM performance vs EEM: +40% since inception vs +20% for EEM - Perth cited outperformance of FRDM over the broad EM benchmark. China weight in broad EM: About 32% currently; as high as 41% in Aug. 2020 - Perth discussed China’s share of EM benchmarks. Autocracy exposure in broad EM: Around 40% - Perth said market-cap-weighted EM can leave investors with roughly 40% in autocracies. MCHI cumulative return since 1992: Approaching 0% - Perth referenced the MSCI China onshore/offshore index as evidence of weak long-term realized returns despite China’s growth. China tech growth: About 4x the S&P 500 growth - Jeremy argued some China tech companies were growing much faster than U.S. equities. EM small-cap valuation: Around 12x earnings - Jeremy compared broad EM valuations with the U.S. market. DGS valuation: Below 9x earnings - Jeremy described WisdomTree’s small-cap EM dividend ETF as very inexpensive. DGS dividend yield: About 5% - Jeremy cited the fund’s average dividend profile. DEM valuation: Around 6x earnings - Jeremy noted the high-dividend EM fund’s low multiple. WisdomTree AUM: About $80 billion globally - Jeremy described the firm’s size and diversification. Russia in EM funds: Previously meaningful; now marked near zero - Jeremy explained that Russia remained in some indexes until rebalance because liquidation and pricing were unclear. Emerging markets performance: Broad EM down about 9% - Jeremy referenced broad EM weakness during the year. S&P 500 valuation: About 20x earnings - Jeremy compared U.S. valuations to EM.

Pivotal Quotes: "there are a lot of these autocracies, and when you market cap weight without regard to country-level governance, you are looking at 40% in autocracies in your broad emerging markets allocation." — Perth Tolle: Perth explaining why FRDM excludes China, Russia, Saudi Arabia, Turkey, Egypt, UAE, and similar regimes. "If you got 0% during a period of extreme growth, good luck going forward." — Perth Tolle: Perth arguing that China’s historical growth has not translated into investor returns and may worsen if policy reverses. "for a while, energy was uninvestable as a sector... and that's exactly when you want it to be invested." — Jeremy Schwartz: Jeremy defending contrarian investing in China despite widespread negative sentiment.

Implications: The episode highlights a growing split in EM investing: benchmark weight versus governance-screened exposure. For listeners, the takeaway is that EM is increasingly a debate about political risk, not just growth, and product design now reflects that divide.