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ETF Of The Week: Avoiding Future Losers

Earlier this week, GraniteShares, a boutique ETF shop that mostly offers commodity ETFs, launched a fascinating new smart beta equity fund: the GraniteShares XOUT U.S. Large Cap ETF (XOUT).

What makes XOUT unusual for a smart beta ETF—or any ETF, really—is that it doesn’t aim to pick winners. Its sole goal is to avoid losers. We thought it would be interesting to look under the hood of this new fund for “ETF of the Week.”

Using fundamental financial data such as revenue growth, profitability and hiring growth, XOUT evaluates and ranks the 500 largest U.S. companies for their ability to weather and keep up with technological disruptions. The stocks determined to be the least well equipped to deal with change are then excised from the index. (The index is reconstituted and rebalanced on a quarterly basis.)

Exclusionary screens are a strategy long used in the thematic and socially responsible investing space, where values are on the line and investors often want to use their money to take a stand. Plenty of fundamental or smart beta funds also set thresholds for, say, volatility or revenue generation, then boot any stock that fails to meet that threshold.

But not often do you see exclusionary screens applied solely to identify performance winners and losers, agnostic of any other metric. The question is, how well will it work?

Surprising & Unsurprising Sector Bets

XOUT currently holds 249 names, or roughly half those you’d find in the SPDR S&P 500 ETF Trust (SPY) or the iShares Core S&P 500 ETF (IVV), the latter of which we’ll use as a comparison.

Information Technology 31.93% 21.96%
Healthcare 19.18% 13.57%
Consumer Discretionary 13.99% 10.05%
Communication Services 11.75% 10.41%
Industrials 8.45% 9.35%
Financials 6.01% 12.91%
Consumer Staples 5.11% 7.55%
Energy 1.35% 4.54%
Materials 1.31% 2.71%
Real Estate 0.94% 3.24%
Utilities 0% 3.60%

Source: Issuer websites. Data as of Oct. 10, 2019. XOUT’s figures are taken from its fact sheet, which is dated Sept. 30; the fund website itself, however, shows figures dating from July.

Unsurprisingly, XOUT leans in hard to technology companies: 32% of the fund is currently in information tech stocks, while 12% is in communication services. IVV, meanwhile, allocates 22% and 10% to each, respectively.

Also not particularly shocking is XOUT’s minimal exposure to materials and energy firms—only 1% each. Both sectors have lagged this year, as trade war woes take their toll.

Missing Real Estate

But XOUT also has only minimal exposure to real estate, the top-performing sector of the past year, and a strong performer over the past decade (read: “Best Performing Real Estate ETFs“).

The fund also has no allocation to utilities whatsoever, despite utilities seeing a 19% rise over the past 12 months (data from Fidelity’s Sector Overview tool).

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