Research Affiliates Launches Innovative “Deletions ETF” Targeting Outperformers
In a move that combines financial strategy with a touch of Valentine’s Day sentiment, Research Affiliates has introduced a new exchange-traded fund (ETF) aimed at capitalizing on the potential of stocks removed from major indexes. The Deletions ETF, trading under the ticker NIXT, seeks to leverage the historical trend of deleted stocks outperforming their former indexes.
Rob Arnott, founder of Research Affiliates, drew an unconventional parallel between relationship breakups and stock deletions to promote the fund. “Just as getting dumped doesn’t mean the end of the road in relationships, being removed from an index doesn’t spell doom for a stock,” Arnott explained.
The ETF’s strategy is based on compelling historical data. From 1991 to 2018, stocks deleted from the S&P 500 and Russell 1000, and from 2004 to 2018 for the Nasdaq 100, outperformed their respective indexes by an average of 28% over five years post-deletion. This phenomenon is partly attributed to the fact that these stocks are often trading at a significant discount before removal, typically down over 50% in the year before deletion.
However, NIXT doesn’t indiscriminately include all deleted stocks. The fund employs a selective approach, excluding stocks in the bottom quintile for quality factors such as profit margins and debt-to-equity ratio.
The ETF’s top holdings have shown remarkable performance over the past 12 months. Lumen Technologies, the fund’s largest holding at 2.63%, has surged 223.5% in the last year. Other notable performers include Affirm Holdings and Telephone and Data Systems, both delivering triple-digit returns.
While most of the fund’s top holdings have outperformed the market, it’s worth noting that not all stocks in the portfolio have seen positive returns. Rivian Automotive, for instance, has experienced an 11.4% decline over the past year.
As the financial world continues to evolve, innovative products like the Deletions ETF offer investors new ways to potentially capitalize on market inefficiencies. However, as with any investment, thorough research and consideration of individual risk tolerance are advised before making investment decisions.
