On Tuesday, Democracy Investment Management, a mission-driven company focused on promoting democracy by influencing capital flows in financial markets, launched the Democracy International Fund (DMCY).
This ETF is a Global Markets ex-United States Large & Mid Cap international equity portfolio that is both democracy and market capitalization-weighted. The Fund seeks to track the total return performance, before fees and expenses, of the Democracy Investments International Index, which leverages an exclusive license to The Economist’s Democracy Index.
Democracy Investments International Index overweights in democracies that embrace ideals such as freedom of speech, fair elections, and civil liberties, and it underweights authoritarian states with links to human rights abuses such as genocide and child labor, as well as media censorship, judicial corruption, and a lack of free and fair elections. The Fund intends to support investors to incentivize democracy by shifting capital towards democratic countries and away from authoritarian countries.
As far as the index strategy, Julie Cane, Democracy Investments’ CEO, states, “Our starting universe is a typical large and mid-cap international equity market cap weighted index. The index is then re-weighted by leveraging the Economist’s Democracy Index. Thanks to our exclusive license of the Economist’s Democracy Index, we will be the first financial product with an objective, transparent, and very robust standard for Democracy. Our ETF tracks the resulting Democracy Investments International Index, which has higher weightings in democratic counties and lower weightings in authoritarian countries.”
Understanding The Index
Looking further into the Index, the Starting universe is the Solactive GBS Global Markets ex-US Index, which is a large and mid-cap international equity market cap weighted index in developed and emerging markets. While this index is very similar to MSCI and FTSE All Country World ex-United States Indexes, Solactive is a respected leader in low-cost fixed fee stock indexes. The index is then re-weighted by the security’s country of risk leveraging the Economist’s Democracy Index. Democracy Investment’s proprietary methodology results in the Democracy Investments International Index, which has higher weightings in democratic counties and lower authoritarian countries’ weightings.
In understanding how the Economist’s Democracy Index is published and calculated, Cane explains, “The Democracy Index is calculated and published annually by The Economist’s Intelligence Unit (EIU), which was founded in 1946 and is the research and analysis division of The Economist. A country’s Democracy Score can range from 0-10 and is a composite of sixty indicators, which are grouped into five categories: electoral process and pluralism, functioning of government, political participation, political culture, and civil liberties.”
As far as what Democracy Investments is hoping to achieve with DMCY, Cane states, “By allocating capital based on democracy scores, we are aiming to increase the cost of capital for authoritarian states, which will lead to reduced economic growth and the reverse for democracies. Additionally, by making investment proportional to democracy scores and never dropping investment in a nation to zero, we hope to maintain a market-based incentive for democratic reforms. A nation that becomes more democratic relative to the rest of the world will see increased investment, while nations that regress will see less. Our goal is to grow large, lower fees, and influence capital flows in a way that will encourage ALL countries to improve their democracy scores. Together, we can affirm Democracy at home by investing in it abroad.”
For more information, visit www.democracyinvestments.com.
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