Arnott's Debut ETF Bets on Index Rejects

Wealth Management Editor

Sep 05, 2024

Reviewed by: etf.com Staff

Edited by: James Rubin

Legendary investor Rob Arnott is jumping into the ETF game with a strategy of buying stocks as they are dropped from major market indexes.

Arnott, founder and chairman of Research Affiliates in Newport Beach, Calif., is the brains behind the Research Affiliates Deletions ETF (NIXT), which begins trading Sept. 10.

NIXT will track the Research Affiliates Deletions Index made up of between 140 and 180 companies that have been removed from the S&P 500 and Russell 1000 indexes over the past five years.

The index methodology, which is a relatively straight forward small-cap value play, is based on Arnott’s research showing that companies dropped from indexes because they fall below market-capitalization minimums tend to outperform the respective indexes over the next five years.

“It’s like picking up coins dropped by a rich man walking down the street,” Arnott said, citing a 7% average 12-month outperformance for dropped stocks.

That average outperformance grows to 28% when the period is extended to five years, he added.

NIXT Strategy "Quasi Active"

Arnott, whose Research Affiliates manages $150 billion through affiliated business relationships, describes the NIXT strategy as “quasi active” even though it is tracking an index.

Based on historical patterns of companies being dropped from indexes, Arnott anticipates NIXT will see an annual turnover rate of between 20% and 40%, with each stock being held for a five-year period.

To avoid crossing over into the proprietary methodologies of the S&P and Russell indexes, Arnott said the Research Affiliates Deletions Index is not designed to perfectly replicate the two brand name indexes, but that it will track similar universes of stocks.

To reduce portfolio turnover, he explained, a 10% banding is used so that a stock has to fall out of roughly the top 550 or 1100 names before it is treated as a deletion from an index.

“Our decision in sponsoring this ETF was driven by a desire to make the index deletions strategy as accessible as possible,” Arnott said.

NIXT has an expense ratio of 39 basis points but is only charging 9 basis points for the first 12 months of trading.

Jeff Benjamin

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Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.

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