In a novel approach to investing, Rob Arnott, known as the “godfather of smart beta”, is launching an Exchange Traded Fund (ETF) that will invest in companies that have been dropped from major indices such as the S&P 500 and the Russell 1000.
What Happened: Arnott and his firm, Research Affiliates, are entering the ETF space with the Deletions ETF, ticker NIXT. The fund is a bet on long-term reversion to the mean, with research indicating that companies removed from indices can rebound and generate future dividends, often outperforming their former indices, Financial Times reported on Wednesday.
Arnott’s move follows other high-profile investors who have launched ETFs, such as BlackRock, T Rowe Price, Pimco, and Franklin Templeton. This trend is in response to the declining market share of mutual funds as lower-cost ETFs gain popularity.
“Everybody likes underdogs. Why not buy the rejects?” Arnott posed to the Financial Times. He pointed out historical data showing that these “rejects” can yield a 5% annual return over the next five years.
Research Affiliates, which manages approximately $147 billion in assets, has noted consistent outperformance from stocks dropped from major indices.
Why It Matters: The launch of Arnott’s ETF comes amid a surge in ETF popularity. Morningstar Direct data shows that investors withdrew more than $173bn from mutual funds while investing over $518bn into ETFs from January through July this year.
The ETF market has been experiencing significant growth, with a record-breaking number of new ETFs entering the market in 2024. This surge has been largely driven by active fund managers.
Furthermore, investors poured $75 billion into U.S. ETFs in August, a fivefold increase compared to the same period last year. This trend, coupled with the consistent outperformance of stocks dropped from major indices, provides a promising backdrop for Arnott’s Deletions ETF.
Price Action: At the time of writing, SPDR S&P 500 ETF Trust (NYSE:SPY) that allows investment in S&P 500 was trading 0.38% lower in the pre-market on Wednesday while Invesco QQQ Trust, Series 1 (NASDAQ:QQQ) was down by 0.65%, according to Benzinga Pro.
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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari
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