Good with the bad

USA

GraniteShares hits the flush button

Commodity ETF specialist GraniteShares is teaming up with Xout Capital to list a quality-like ETF that tries to improve the S&P 500 by identifying and removing losers. The GraniteShares XOUT US Large Cap ETF (XOUT) starts with 500 US large caps then runs a proprietary quant screen aimed at removing corporate excrement.

Excrement is 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 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 influential 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, while almost all 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 it’s only realistic to expect that it involves taking certain risks.  

Inspire lists internationally biblically responsible ETFs

Inspire Investing, a major player in Christian ETFs, is listing another biblically aligned ETF, this time targeting international equity. The Inspire International ESG ETF (WWJD) will invest international companies after applying negative and positive ESG screens. 

The negative screen excludes the familiar corporate baddies (alcohol, tobacco, weapons, gambling). It then adds a Christian slant and further excludes companies providing abortion-enabling products or services, those promoting “the LGBT lifestyle”, those with poor labour practices and those that discriminate against Christians.

The positive screen gives higher scores to those help the poor, pay their workers properly and have Christian themed products. The fund charges 0.80%.