Behind the Ticker: RAUS, NIXT, & Research Affiliates

Behind the Ticker offers investors a chance to get under the hood of newer or more niche ETFs. Brad Roth, Managing Partner and CIO of Thor Financial Technologies, talks strategy and the human side of investing and ETFs with the individuals bringing these funds to market. 

In this episode recorded live at Exchange, Roth talks with Rob Arnott, the Founder and Chairman of Research Affiliates and creator of the RAFI Indices. Arnott's 2005 breakthrough of weighting companies fundamentally based on their size versus market cap shook the industry at the time. 20 years on, the index beats cap-weighed value indices relatively consistently. The conversation covers RAUS and NIXT, two ETF's that track Research Affiliates indices, the thesis behind them, and also a third ETF likely to come to market by year's end focusing on growth. 

You can also listen to this episode on Spotify, Apple Podcasts, or any of your preferred streaming platforms. 

A Fundamental Approach to Investing

Rob Arnott is the Founder and Chairman of Research Affiliates, the firm behind the Fundamental Index methodology and one of the most influential bodies of applied investment research of the last 30 years. The firm manages roughly $180 billion in assets, with none of it run directly by Research Affiliates. Instead it licenses its indices and strategies to distribution partners including PIMCO and Invesco, allowing it to remain singularly focused on product innovation.

Arnott's path to finance wasn't obvious. In college at UC Santa Barbara, he concluded he had the math skills for astrophysics but lacked an intuitive feel for quantum mechanics, and reasoned he could instead be one of the early practitioners applying scientific method to markets. That framing — rigorous, research-driven, contrarian — has defined Arnott's career ever since. He started at The Boston Company, later spent time at TSA Capital Management, then Salomon Brothers during the 1987 crash, which he describes as an education in office politics more than investing. He then built First Quadrant before leaving in 2002 to start Research Affiliates. 

The conversation covers a lot of intellectual ground, beginning with Research Affiliates' Fundamental Index, or RAFI, which Arnott published in a 2005 paper. The idea is straightforward in principle: instead of weighting stocks by market capitalization — which systematically overweights overpriced stocks and underweights underpriced ones — weight them by the economic footprint of the underlying business, using metrics like sales, profits, and book value. RAFI itself now has a 20-year live track record, beating cap-weighted value indexes in roughly three out of every four years — winning by more when value is in favor, losing by less when it isn't.

Arnott's views on where the market stands today is unambiguous: he believes the Magnificent Seven have produced something that looks like a bubble, not as frothy as the dot-com era on an absolute basis, but with the spread in valuation between growth and value indexes at roughly an 8:1 ratio — the same level as the peak of the dot-com bubble, and only briefly exceeded during the COVID-era value trough. 

Under the Hood of RAUS and NIXT

The two ETFs discussed are RAUS and NIXT. RAUS — the RACWI (Research Affiliates Cap-Weighted Index) US ETF — is a deceptively simple idea. Rather than selecting stocks when their market cap crosses a threshold, RAUS selects stocks when the underlying business itself grows large enough to qualify. And rather than deleting stocks when their price falls, RAUS removes them when the business shrinks below the threshold. The result is a portfolio of roughly 500 names with 80% overlap with the S&P 500 and 95% weight overlap, yet that 5% difference has produced 70 basis points of annual outperformance over a 30-year back-test. 

NIXT — the Research Affiliates Deletions ETF — is the more unconventional of the two. The thesis comes directly from Research Affiliates' own data showing that stocks removed from major indices have historically outperformed by roughly 2,000 basis points in the year after deletion, a figure heavily skewed by the dot-com bubble. When averaged over time rather than by number of samples, the outperformance is approximately 5% annually, persisting for up to five years. The logic: index deletions are usually already beaten-up companies, and the mechanical forced selling by index funds at the moment of deletion pushes valuations below where they should be. 

The third product is still in development: a RAFI-based growth index. Rob's team came to him three years ago with the argument that RAFI's core principles — fundamental selection and fundamental weighting — could be applied to growth investing by replacing the question "how expensive is this stock?" with "how fast is this business actually growing?" The index selects the top 25% of the market by five-year growth in sales, profits, and R&D spending, then weights holdings by the dollar magnitude of that growth rather than by market cap. An ETF is expected before year end.

Research Affiliates can be found at ResearchAffiliates.com, where the Insights section houses over 400 published papers, more than 150 of them in peer-reviewed academic journals. 

Disclaimer: The market insights, projections, and investment strategies expressed in this podcast are solely those of the contributor and do not necessarily reflect the views or opinions of ETF.com This content is provided for informational purposes and does not constitute financial, investment, or legal advice. 

Discover the news, data, and voices shaping the ETF community. Follow along here.