- 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.
“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.”
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:
Market cap: $410 billion
Returns YTD: -8.6%
Analysis: “As XOUT’s current largest market-cap eliminated stock, Visa has been a steady market laggard since XOUT’s inception and indeed emerged as one of the simplest stocks in the payments industry,” Rhind said. “This former steamroller has lost relative market value to more disruptive peers such as PayPal and Square.”
“Over the past quarter, Visa underperformed the market by 5.2%, and XOUT’s proprietary model detected weak revenue growth and poor management execution,” he added.
Market cap: $470 billion
Returns YTD: 27%
Analysis: “JPM was X’d OUT this quarter due to the combination of poor revenue metrics and human capital divestment,” Rhind told Insider. “Revenue growth remains negative on both first and second-order analyses in our proprietary model; in fact, growth of -4.64% places it in the bottom 8% for all large cap companies.”
Market cap: $260 billion
Returns YTD: -20%
Analysis: “For all the investor hype surrounding Disney+, would you believe Disney shares are down year to date when the market is up?” Rhind said. “This disparity is a case study in the perils of chasing emotion instead of quantitative analysis.”
“In our model, Disney has consistently scored quite poorly,” he added. “Not only does revenue growth and acceleration remain negative, but gross profitability is in the lowest quintile, and investment is in the second lowest quintile.”
Market cap: $190 billion
Returns YTD: 60%
Analysis: “Wells Fargo exemplifies the virtues of a true secular decline: a once-vaunted, indeed mammoth institution, that has been challenged with unethical behavior to mask business decline,” Rhind told Insider. “It has endured exceptionally volatile returns, experiencing drawdowns of up to 60%, corroborating our thesis that bad companies disproportionally contribute to market risk – it is just easier not to own.”