It's relatively easy to argue that some type of exposure to emerging markets belongs in most U.S. investor portfolios. Emerging markets represent about 4.3 billion people, 50% of the global GDP, but only a relatively small percentage of global equities' market cap. Emerging markets are usually defined as a country with a developing economy that shares some, but not all, characteristics with a developed economy.

To discuss emerging markets more, 7investing lead advisor Matthew Cochrane welcomed Perth Tolle, the founder of Life and Liberty Indexes, to 7investing's podcast.

The two coincidentally talked on February 24, 2023, the first anniversary of the Russian invasion of Ukraine. As the conflict began, U.S. investors were forced to quickly confront the geopolitical risks of investing in emerging markets as Russian equities were removed from the emerging market indices at $0.

Investors in Tolle's Freedom 100 Emerging Markets ETF (CBOE:FRDM) didn't face this problem as the ETF had no exposure to Russian securities. The ETF is a freedom-weighted equity strategy that uses personal and economic freedom metrics as primary factors in its investment process. This means it doesn't have heavy exposure to countries such as China or Russia, markets that traditionally hold larger allocations in emerging market funds.

Tolle and Cochrane discuss that even as China's GDP growth has exploded in recent decades, shareholders in Chinese equities have managed to capture very little of that wealth. With China's government in virtually total control of its economy, it can change laws and regulations on a dime. It will often dictate new rules for businesses as it deems fit. This environment makes it very difficult for shareholders to recognize any profits.

Tolle and Cochrane also discuss emerging markets that enjoy economic and personal freedoms, such as Chile, South Korea, and Taiwan. Exposure to Chilean markets, for instance, rarely rises above 1% allocations in most emerging market funds. The Freedom ETF enjoys a double-digit allocation that has tremendously boosted FRDM's returns compared to the emerging market index, contributing to Freedom's relative out-performance.

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