In a recent episode of Behind the Ticker, Rob Arnott, founder and chairman of Research Affiliates, shared insights into the firm's latest innovation, the Research Affiliates Deletions ETF (ticker: NIXT). With nearly 50 years in investment management, Arnott has built a reputation for pioneering quantitative investing strategies, particularly through the development of the Fundamental Index methodology. Research Affiliates, founded in 2002, now indirectly oversees $158 billion in assets through partnerships with firms like Schwab, Invesco, and PIMCO.Arnott explained that NIXT was created to exploit inefficiencies in traditional market-cap-weighted indexes. When companies are removed from major indices like the S&P 500 or Russell 1000, they often experience exaggerated price declines, pushing them to deep value levels. Historically, these "deleted" stocks tend to recover significantly, often outperforming the market in the years following their removal. NIXT systematically captures this mean reversion by identifying and investing in stocks that have been dropped from indices due to temporary underperformance rather than fundamental deterioration.The fund follows a rules-based process where deletions from the top 500 and top 1,000 market cap rankings are screened for quality metrics, eliminating the bottom 20% to avoid value traps. The remaining stocks are then held in equal weight for five years, allowing time for revaluation and recovery. Arnott noted that this approach benefits from both the structural inefficiencies of index deletions and the broader opportunity in small-cap and deep value stocks, which are currently trading at historically low relative valuations.Arnott positioned NIXT as a unique completion strategy, complementing traditional market-cap-weighted portfolios by reintroducing stocks that indices have discarded too soon. While not intended as a core allocation, NIXT provides an alternative way for investors to gain small-cap value exposure with a systematic, contrarian approach.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Rob Arnott covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
It's that the mere process of adding a stock just because it's market cap is sort, deleting a stock just because it's market cap is tanked. Is that process in and of itself is the problem. And so what we do is when a stock falls out of the top 50 or out of the top 1100, it's on our deletions list. Now what we've noticed is that deletions outperform the market by an average of 7% per year, the first couple of years tapering off to about 3% after 5 years, total of 28% 2800 basis points about performance over the 5 years after deletion.
Today we have on Rob our know he is the founder of research affiliates. And we are very pleased to have him. He's got over 50 years of investment management experience, particularly pioneering qualitative or quantitative excuse me, investment strategies and really coming up with index methodology for a ton of different strategies. You are probably very familiar with but today we're talking in detail about the next or NIXT which is the research affiliates deletion ETF.
Market Context and Positioning
We're best known for our work in global multi asset strategies. Global tech to class at allocation. We run the PIMCO all asset product suite. And M4 developing quantitative equity strategies, notably fundamental index on a million taxes over a hundred of our hundreds, 56 billion. And the notion with fundamental index is quite simply why should we choose stocks for our index based on how popular and expensive they are, which is what happens with cap waiting. And why should we wait stocks that way?
And there's a lot of curve fitting and optimization going on. And we know over time that, you know, you might have a short window of alpha performance, but that's likely not to be the case, specifically for someone who's had a long track record, like you guys ever. Yeah, we've had the fundamental indexes now 20 years old. And it's performance relative to the market hinges on how value is doing. So if value is doing well, we have a tailwind to values struggling, we have a headwind, but we beat value by enough that our 20-year results are ahead of the broad market, even though value is 3,000 basis points behind the market.
Value's been tough for anybody invested in values over the last G's 36 months, it seems. Well, and you can go back 15 years. It's really since 2007 is when value peaked relative to growth and some of the 2020 is when it hit bottom. But it's been bottom bouncing since then. Right now, it's not too far off of the 2020 lows in terms of the relative cheapness of value relative to growth. If you look at price to book value, value was one third as expensive as growth in 2007.
Notable Insights
"In Vesco, pro shares, Schwab, Schwab is the biggest relationship and pin cope."
"Well, that's why buy high and sell low again and again when the size of the business was moving up and down a little bit and the size of the market cap was plunging and crashing."
Key Takeaways
- While not intended as a core allocation, NIXT provides an alternative way for investors to gain small-cap value exposure with a systematic, contrarian approach.
- The conversation explores important themes in growth investing relevant to today's advisor landscape.
- The conversation explores important themes in portfolio construction relevant to today's advisor landscape.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Rob Arnott highlights important considerations around quantitative investing. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of quantitative investing and growth investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Rob Arnott, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.