GraniteShares
- GraniteShares’s XOUT ETF excludes 250 ‘loser’ stocks from the S&P 500.
- Its founder Will Rhind uses seven metrics to identify firms that aren’t adapting to technological disruption.
- Rhind explained his investing strategy to Insider and listed four stocks he’s avoided this quarter.
Will Rhind believes that his ‘avoid the losers’ ETF offers a rare middle ground between active and passive investing.
“Active management is all about picking winners, while passive investors just accept that that’s too difficult,” GraniteShares’s founder told Insider in a recent interview. “Our philosophy is to flip that paradigm.”
An ETF (exchange-traded fund) tracks a specific sector or theme. Rhind’s XOUT fund tracks half of the S&P 500, excluding 250 ‘losers’ based on seven factors.
Those metrics – revenue growth, employee growth, R&D investment, stock buybacks, profitability, earnings forecast, and management score – measure how quickly a company is adapting to technological disruption.
“We see disruption as the biggest risk that can’t be captured by a traditional value filter,” Rhind said. “We’re looking to exclude companies that aren’t growing, or are failing to adapt.”
Will Rhind
Rhind told Insider XOUT tends to outperform benchmarks in stock market downturn. Since the ETF was founded in October 2019, it has delivered returns 14% higher than the S&P 500.
“The extreme example came last year, during Covid-19, when the physical economy was separated from the digital economy,” Rhind said. “Firms that couldn’t support themselves digitally were put out of business overnight.”
“I don’t think we’re in a bubble, but if you look at days like last Friday, there was a big letdown in the market, but XOUT outperformed,” he added.
Since October 2019 XOUT has risen by almost 78%, compared with a gain of 52% in the S&P 500.
Rhind also said the popularity of index funds and other passive vehicles has meant investors often fail to notice when a sector is struggling.
“Some people have been so indoctrinated into the passive-investing dogma that they don’t realize that there is still risk in that portfolio if lots of companies don’t make it,” Rhind told Insider. “Right now, there are a lot of zombie companies that are only sustaining themselves by shuffling debt.”
GraniteShares recently ‘X’d out’ four prominent companies from its large-cap ETF. Rhind said the only common factor between them was “scoring poorly” on the seven criteria, leading to their exclusion from the top 250.
Insider lists those four stocks below: