Behind the Ticker: RAUS, NIXT, and Research Affiliates’ Methodology

Why It Matters

Fundamental‑weighting ETFs like RAUS provide a low‑cost, alpha‑generating alternative to traditional cap‑weighted funds, while cautioning investors against over‑reliance on concentrated tech narratives that could repeat past bubble dynamics.

Key Takeaways

• Fundamental indexing weights stocks by business size, not market cap
• RAUS ETF outperformed S&P 500 by ~90 bps since launch
• Smart‑beta strategies generate ~2% annual rebalancing alpha for investors
• Current AI‑driven ‘Magnificent 7’ resembles past growth bubbles in valuation
• Low‑fee launch strategy encourages early adoption and scalability

Summary

The Behind the Ticker episode features Rob, a former Wall Street strategist turned Research Affiliates founder, unpacking the evolution of his fundamental‑index methodology and its translation into exchange‑traded products. He traces his journey from early quantitative work at Boston Company and Solomon Brothers to creating the first fundamental index in 2005, a “smart beta” approach that weights securities by economic footprint rather than market price.

Rob explains that the rebalancing effect of trimming over‑valued stocks and buying under‑priced ones delivers roughly 2% annual alpha, a claim supported by a 20‑year track record that outperforms cap‑weighted value indexes three out of four years. The newly launched RAUS ETF, a cap‑weighted version of the Research Affiliates index, has already beat the S&P 500 by about 90 basis points with a tracking error under 0.5%, while charging no fee in its first year.

He warns that today’s “Magnificent 7” tech rally mirrors the dot‑com bubble, noting that valuation spreads are as wide as they were at the peak of that era. Rob cites the example that only one of the ten most valuable tech stocks in 2000 eventually outperformed the market, underscoring the risk of over‑concentration and the need for systematic, fundamentals‑driven allocation.

For investors, the conversation highlights the appeal of low‑cost, rules‑based ETFs that capture fundamental value while avoiding the inefficiencies of pure cap‑weighting. It also signals that the current market offers deep value opportunities in small‑cap, non‑U.S., and growth‑adjusted indices, making a case for diversified exposure beyond the AI‑centric narrative.

Original Description

What if the way we weight indices is fundamentally broken? In this episode of Behind the Ticker, Brad Roth (CIO of Thor Financial Technologies) sits down with a true industry legend: Rob Arnott, Founder and Chairman of Research Affiliates.

Recorded live at the Exchange conference, this deep dive explores how Arnott’s 2005 breakthrough—weighting companies based on their actual economic footprint rather than their stock price—shook the foundations of the investing world. Two decades later, the data speaks for itself.

In this episode Arnott explains why market-cap weighting systematically overweights expensive stocks and how the RAFI methodology fixes it. He also shares his unambiguous views on today’s valuation spreads, including what’s the same and what’s different from the dot-com era.

The discussion includes a look under the hood of two unique ETFs that each track a Research Affiliates index. One selects stocks based on business size (RAUS), while the other is a contrarian play that buys the stocks other indices trash (NIXT).

Arnott also talks about the firm’s decision to wade into growth investing and how their approach differs from traditional growth strategies.

Follow along with the conversation over at: https://www.etf.com/sections/podcasts/behind-ticker-raus-nixt-research-affiliates

Or follow along on Spotify as well as any of your preferred streaming platforms: https://open.spotify.com/episode/2vZ1ezoEnbn9SFRrPOcphR

Featured ETFs:

-RAUS (Research Affiliates Cap-Weighted Index US ETF): Selecting companies by business growth, not just stock price.

-NIXT (Research Affiliates Deletions ETF): Capturing the rebound of companies mechanically sold off after index deletion.

About Rob Arnott & Research Affiliates:

Rob Arnott is a pioneer in applied investment research. Research Affiliates currently oversees roughly $180 billion in assets through its various index and strategy licenses. With over 400 published papers, they remain a powerhouse of evidence-based, contrarian investing.

Connect with Research Affiliates:

Website: https://www.researchaffiliates.com/home