Exchange-traded funds devoted to technology are already a big hit this year despite occasional trade tensions. Robust industry fundamentals and rapid adoption of emerging technology have made this possible.
But the other side of the story is that the innovation is happening faster than the market can fully cope with. There are sectors and companies that are failing to keep up with the momentum. GraniteShares has highlighted those stocks and excluded the same to form a new ETF called GraniteShares XOUT U.S. Large Cap ETF (XOUT) in association with XOUT Capital.
XOUT in Focus
The methodology of the underlying index looks to block out companies likely to suffer from technological disruption rather than gain from it. In other words, the index seeks to dump companies that are lagging the fast growth of technological innovation. Instead of highlighting the winners, XOUT follows an investing paradigm, which seeks to identify companies likely to underperform, and bars them from entering the portfolio.
The fund holds 249 stocks in its basket. It invests 31.8% weight in the technology sector, followed by 20.36% weight in financials and 14.1% focus on communications. Microsoft (6.3%), Apple (6.3%) and Amazon (5.3%) are the top stocks of the fund. It charges 60 bps in fees.
The index methodology assesses companies and attaches a score to them based on “seven metrics related to technological disruption: revenue growth, hiring growth, capital deployment, share repurchases, profitability, earnings sentiment and management performance. It selects the top-scoring stocks from the largest 500 U.S. stocks and weights them by market capitalization, according to the prospectus,” as quoted on etf.com. Notably, the fund rules out 250 names that do not conform to technological disruption, per the factsheet.
How Does It Fit in a Portfolio?
“Disruption is one of the most significant, forward-facing risks impacting investors and companies today,” per XOUT Capital founder and CEO David Barse, who developed the exclusion-based strategy.
Disruptive technology is an innovation that changes the way consumers, industries or businesses operate. “Recent disruptive technology examples include e-commerce, online news sites, ride-sharing apps, and GPS systems,” per Investopedia.
Added to these, there is Artificial Intelligence, Blockchain, Virtual/Augmented Reality, Internet of Things, mobile Internet, Cloud, Advanced Robotics, 3-D Printing, Energy Storage, Next-generation genomics, Advanced materials, renewable energy etc. No wonder, companies not compatible with such disruptive technologies are likely to suffer in the long run.
Strategy-wise, the fund is pretty unique. But it also means that the fund includes those companies that are compatible with and beneficiaries of technological disruption. So, holdings-wise, XOUT could be similar to funds that focus on disruptive technologies. ALPS Disruptive Technologies ETF (DTEC - Free Report) is a pure-play fund on this concept (read: Beyond FIVG, Another ETF to Give You 5G Exposure).
There is also The Defiance Quantum ETF (QTUM - Free Report) . It follows the BlueStar Quantum Computing and Machine Learning Index that consists of a modified equal-weighted portfolio of the stock of companies whose products or services are predominantly tied to the development of quantum computing and machine learning technology. The fund charges 40 bps in fees.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>