The Free Markets ETF (FMKT)

The Free Markets ETF is an exchange-traded fund that tracks an index of US public companies in sectors characterized by minimal direct government involvement, preferring businesses subject to open competition and market discipline over those receiving subsidies, regulatory favours, or protected status.

The philosophy behind the exclusions

Most broad equity index funds — the S&P 500, the total US market index — include every large publicly traded company, regardless of sector or business model. The Free Markets ETF takes a different view: it excludes companies that depend primarily on government contracts, subsidies, rate regulation, or protected monopoly status. This screens out defence contractors, utilities, government contractors, and telecommunications carriers whose revenues flow largely from government mandates rather than consumer or business choice.

The exclusions are mechanical and deliberate. A company qualifies for inclusion if its revenue streams depend on open markets where customers have alternatives and where profitability requires competing on price, quality, or innovation rather than regulatory barriers. Utilities, for example, operate under rate regulation that limits their profit margins and guarantees a return on invested capital — a model fundamentally different from a restaurant, a software company, or a retailer that must earn every customer’s business. Defence contractors derive their revenue from government procurement, not market competition. The fund’s construction reflects a philosophical conviction that markets without artificial barriers or government dependence allocate capital more efficiently and tend to create better long-term shareholder value.

Index composition and weighting

The underlying Free Markets Index holds US-listed companies across conventional sectors: consumer discretionary and staples, technology, financials, industrials, healthcare, energy, and materials. Excluded sectors include most utilities, primary telecommunications carriers, and energy infrastructure firms (pipeline and transmission operators). Large financial institutions are included, since they depend on open competition for deposits, lending, and capital markets business, not rate regulation. Within the index, holdings are weighted by market capitalisation, meaning the largest companies exert the greatest influence on the fund’s returns. This gives the fund a natural tilt toward household names and mega-cap technology and consumer companies, though smaller and mid-cap firms meeting the free-market criteria are represented.

Because the index is rules-based and published, the fund’s holdings and weightings are transparent and predictable. Index changes are typically announced in advance, preventing the information asymmetry that sometimes benefits active managers.

Costs and how it trades

As a passive fund, FMKT carries expenses well below those of most actively managed funds. The expense ratio typically reflects nothing more than the costs of holding the securities and operating the fund itself — administration, custody, transfer agency, and the index licence fee. There is no management team second-guessing the index or trading in and out of positions.

The fund trades on an exchange like any stock. Its share price moves continuously during trading hours, reflecting the value of its underlying holdings. The bid-ask spread — the difference between what a buyer is willing to pay and what a seller is willing to accept — is usually narrow for a liquid ETF like this one, meaning transactions cost little. The fund is open-ended, so shares can be created and redeemed by authorised participants to keep the share price in line with the fund’s underlying net asset value; redemptions and creations happen in the background and rarely affect ordinary shareholders.

Investors in FMKT typically receive distributions of dividends paid by the underlying companies, usually quarterly, and capital gains distributions if the fund rebalances or adjusts its holdings.

The real case for and against this approach

The free-market exclusion screen appeals to investors who believe competitive markets generate superior returns because they reward innovation, efficiency, and customer satisfaction while punishing waste. Utilities and regulated companies, the argument goes, lack the competitive discipline to deploy capital as productively; their returns are often moderate and guaranteed by regulation rather than earned through excellence. Over long periods, truly competitive businesses should compound wealth more reliably than protected ones.

The counterargument is equally straightforward: utilities and certain government contractors provide stable, predictable cash flows and dividends that index investors need for diversification. Excluding them reduces exposure to large sectors of the real economy. A utility company may earn a modest but reliable 8% return on capital indefinitely; excluding it means missing that steady income in exchange for exposure to a software company that might return 20% or might crash. Furthermore, the definition of “free market” is subjective — reasonable people disagree about which businesses are truly dependent on government favour versus those that happen to operate in regulated industries but still compete fiercely within those rules.

How a reader would research FMKT

Start with the fund’s prospectus and most recent annual report, available through the fund provider’s website. These documents detail the index methodology, the full list of holdings, the expense ratio, and any risks or constraints. The prospectus explains precisely which sectors are excluded and why, and gives a clear rationale for the free-market screen.

Compare FMKT’s performance over multiple time periods — one year, three years, five years, and ten years if available — against the S&P 500 or total US market index. The performance difference will largely reflect the impact of the exclusions; some periods FMKT will lead (if competitive tech and consumer companies outperform), other periods it will lag (if utilities and defensive sectors outperform during downturns). Pay attention to the turnover rate; a truly passive index fund should have very low turnover, just reflecting additions and deletions to the index itself.

The fund’s tracking difference — the gap between the fund’s actual return and the published return of its underlying index — should be small, typically just the expense ratio. Large tracking difference suggests administrative drag or market-impact costs. Finally, watch the fund’s size and trading volume; a growing, actively traded fund is more likely to remain efficient and competitive on costs than a shrinking, thinly traded one.