Westwood ETF Says it Pays to Be Democratic

Democracy may be good not only for governments, but also for clients’ returns.

Last week, Westwood Holdings Group launched its LBRTY Global Equity ETF (BFRE), which the company is calling a first-of-its-kind fund that seeks to limit both direct and indirect exposure to authoritarian regimes including China, Russia, Turkey, and others, while maintaining broad market exposure. The fund tracks the LBRTY All World Equity Index from asset manager TOBAM, which claims that investors will have better outcomes if they ditch stocks exposed to the negative financial impacts of authoritarian nations’ wars, social unrest, waste, and corruption. Westwood, headquartered in Dallas, managed roughly $17.6 billion at the end of last year.

The ETF comes at a time when Chinese equities have been on a tear, with the MSCI China index up roughly 15% year-to-date, and advisors are considering how much they should expose their clients to the Middle Kingdom. “There is no lasting prosperity without democratic institutions,” TOBAM CEO Yves Choueifaty said during a press event at the New York Stock Exchange on Thursday.

Power of Democracy

While there are already plenty of ex-China funds and products that don’t directly invest in non-democratic countries, Westwood and TOBAM argue they fail to take into account all the indirect exposure, which holds much more weight. Some 85% of investors’ exposure to autocracies comes indirectly by way of western stocks, according to the two firms. “You cannot say in 2020, ‘I do not own Russian stocks, therefore I am not exposed to Russia,’” Choueifaty said, citing how French bank SocGen took a $3.3 billion hit upon selling Rosbank and its Russian subsidiaries after Russia invaded Ukraine in 2022.

TOBAM took the MSCI ACWI (All Country World Index) and calculated that it had an “autocracy risk factor” of 400 bps. The firm claims its LBRTY index was designed to lower that volatility to just 60 bps. To achieve less exposure to authoritarian regimes, the fund removes securities that have a high “autocracy risk factor” but low tracking error.

BFRE isn’t totally hands-off on authoritarian countries, however. For example, its third-largest holding is Apple, which manufactures the overwhelming majority of its products in China. “If we wanted to remove every security that had a beta to China and other authoritarian regimes, we’d have a portfolio of nothing,” said Greg Behar, head of managed investment solutions at Westwood.

Get the ESG Outta Here. It may sound like BFRE could be labeled as an environment, social, and governance-focused product, but Westwood and TOBAM don’t market it as such, and believe ESG funds tend to turn a blind eye to democracy. A lot of green investing can happen in deeply authoritarian countries, said Philippe Bolopion, TOBAM managing director. “You may feel good about investing in a solar panel company in China, but what do you know about the working conditions in their factory?” he said.