This ETF provider thinks it's time to rethink investing in China

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Investors may want to reducetheir exposure to the world's largest emerging market.

Perth Tolle, who's the founder of Life + Liberty Indexes, warns China's capitalism model is unsustainable.

«I think the thinking used to be that their capitalism would lead to democracy,» she told CNBC's «ETF Edge» this week. «Economic freedom is a necessary, but not sufficient precondition for personal freedom.»

She runs the Freedom 100 Emerging Markets ETF — which is up more than 43% since its first day of trading on May 23, 2019. So far this year, Tolle's ETF is up 9%, while the iShares China Large-Cap ETF, which tracks the country's biggest stocks, is up 19%.

The fund has never invested in China, according to Tolle.

Tolle spent part of her childhood in Beijing. When she started at Fidelity Investments as a private wealth advisor in 2004, Tolle noted all of her clients wanted exposure to China's market.

«I didn't want to personally be investing in China at that point, but everyone else did,» she said. «Then, I had clients from Russia who said, 'I don't want to invest in Russia because it's like funding terrorism.' And, look how prescient that is today. So, my own experience and those of some of my clients led me to this idea in the end.»

She prefers emerging economies that prioritize freedom.

«Without that, the economy is going to be constrained,» she added.

ETF investor Tom Lydon, who is the former VettaFi head, also sees China as a risky investment.

 «If you look at emerging markets… by not being in China from a performance standpoint, it's provided less volatility and better performance,» Lydon said.