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Exclusionary Tactics Make A Difference With This ETF

July 23, 2020 12:10 pm
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Exclusionary Tactics Make A Difference With This ETF

When it comes to exchange-traded funds, investors are often programmed to believe what's inside is what matters most.

Obviously, investors should know what they're buying when considering an ETF, but what's excluded is important, too. The GraniteShares XOUT U.S. Large Cap ETF (NYSE:XOUT) confirms that what's excluded can be as meaningful as what's included in an ETF.

XOUT, which turns a year old in November, follows the XOUT U.S. Large-Cap Index, a benchmark rooted in a simple premise: avoiding stocks that are poised for big losses can be almost as potent as identifying winners.

Why It's Important: XOUT is up nearly 9% year to date, well ahead of the 1.55% returned by the S&P 500. However, XOUT is delivering that impressive while not being any of the following: a technology fund in disguise, a large/mega-cap growth ETF or a fund that's dedicated to the momentum factor.

In fact, XOUT looks to break traditional style barriers. It's not a growth, value, low volatility, quality or momentum fund. Rather, the fund focuses on seven components: revenue, share buybacks, profitability, earnings estimates, management scores, research and development spending and employee growth.

By incident not intent, those points of emphasis lead to an overweight position in tech (36.14%) and the growth feel of the fund is accentuated by a combined 31% weight to consumer cyclical and communication services names.

There's some defensive augmentation via an 18.46% allocation to health care stocks, XOUT's second-largest sector weight.

What's Next: “Any style exposures that result from the elimination of 'bad companies' are entirely incidental,” according to GraniteShares. “This year, the XOUT ETF is positively correlated to growth and negatively correlated to value. The 'loser detector' eliminated banks and oil companies which happen to have lower valuations, but not all banks and not all oil companies, only those failing to keep up with the pace of disruption in their industry.”

Looked at differently, XOUT's index is underweight the value, leading to a combined weight of just 5.6% to financial services and energy stocks. Those are two of the worst-performing sectors in 2020. Additionally, the ETF only devotes 0.24% to real estate, a sector that's been home to rampant dividend cutting and suspensions this year.

XOUT also features no utilities exposure, underscoring the point that owning the entire market or 500 stocks in one index isn't always the way to go. This unique fund proves as much.

“Since XOUT’s inception of October 7, 2019, it has exceeded the returns of the S&P 500 TR Index by more than 10%, up 22.78% vs 12.36% for the core benchmark over that same period. XOUT passed the 'stress test (Covid-19 pandemic) with flying colors,” notes GraniteShares.

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