The GraniteShares XOUT US Large Cap ETF (XOUT) starts with 500 US large caps then runs a proprietary quant screen aimed at removing certain companies that do not meet certain standards.
These standards are identified using seven factors: revenue, staff count, investment, buybacks, profits, sentiment and management performance. Companies are scored on each of these factors then given an overall result. Those in the lowest 100 or so are then flushed down the toilet.
Securities are then market weighted with quarterly reconstitutions. The fund charges 0.60%.
Analysis – nice idea – but exclusions carry risks
Hendrik Bessembinder, a professor of finance at Arizona State, tried to explain why index funds do so well. In an exhaustive study published in 2017, he broke down the US stock market’s returns for 90 years on a company by company basis. His conclusion: a mere 0.3% of American companies have accounted for almost half the stock market’s gains since 1926. And almost all of the stock market’s gains come from the top 4% of companies. (See here for the list and study). The majority of listed American companies perform worse than T-bills.
The bottom line: identifying duds – as XOUT aims to do – is pretty easy as most companies end up being duds. However if you get your exclusions wrong, and miss one of the winners (your Apple, Microsoft, McDonalds, etc), you miss out on a lot of the index gains.
In all, I like this listing. It strikes me a quality ETF done right. And if you want to beat the index its only realistic to expect that it involves taking certain risks.