New ETF Seeks To Exclude Losers

Although best known for its low-cost commodity ETFs, that asset class is not GraniteShares’ only focus, and today the firm added a smart beta equity fund. The GraniteShares XOUT U.S. Large Cap ETF (XOUT) relies on fundamental data to screen out companies that it classifies as likely poor performers based on how well they are equipped to deal with technological disruption.

XOUT comes with an expense ratio of 0.60% and lists on the NYSE Arca.

Excluding The Losers

The methodology of the underlying index is designed to screen out companies likely to suffer from technological disruption rather than benefit from it. In other words, the index seeks to avoid companies that are not keeping up with the pace of technological innovation.

“Disruption is one of the most significant, forward-facing risks impacting investors and companies today,” said XOUT Capital founder and CEO David Barse, who developed the exclusion-based strategy.

The index methodology evaluates companies and assigns them a score based on seven metrics related to technological disruption: revenue growth, hiring growth, capital deployment, share repurchases, profitability, earnings sentiment and management performance. It selects the top-scoring stocks from the largest 500 U.S. stocks and weights them by market capitalization, according to the prospectus.

Barse notes there are thousands of metrics by which companies can be evaluated, and says XOUT’s methodology targets “fundamental financial measurements that should drive companies that are succeeding, growing, thriving and disrupting.”

The idea behind the fund, according to Barse, is to identify the losers rather than trying to pick the winners. “Our edge is in the fact that nobody’s doing it this way,” he said.

He points to General Electric and AT&T as notable names excluded from the index.

Entering The Smart-Beta Space

GraniteShares is a relatively new issuer, and founder and CEO Will Rhind notes it entered the commodity space first because that was where the firm saw the most opportunity.

“The philosophy of the firm [GraniteShares] has been to try to innovate around the most interesting and disruptive ideas in the market,” said Rhind of his firm’s decision to partner with Barse’s firm to develop XOUT.

“I think what’s so great and innovative about XOUT is that it’s just a fundamentally intuitive concept,” Rhind noted. “It’s much easier in principle to identify a company that is likely to underperform or is in secular decline than to pick the next Google.”

Contact Heather Bell at [email protected]