US investment advisor Research Affiliates last month launched its first ETF – an index reject strategy – and is now discussing rolling the product out in Europe, a source familiar with the matter told ETF Stream.

Research Affiliates has witnessed strong early interest in the strategy from European investors and while discussions are at an early stage, the product could be made available in Europe if interest continues to build, ETF Stream understands.

The Research Affiliates Deletions ETF (NIXT), which launched last month in partnership with white-label issuer ETF Architect, is a contrarian strategy that looks to capitalise on the long-term mean reversion of stocks removed from large and mid-cap indices.

The ETF buys stocks which drop out of the top 500 or top 1000 US companies by market cap and holds them for 5 years in an equally-weighted portfolio, rebalancing annually.

The firm’s research showed that stocks tend to substantially underperform during their final year in the index, but outperform the market for at least five years after.

“The phenomenon that we have researched seems to be robust, to have worked year over year, and we are confident it is going to work out,” said Ari Polychronopoulos, head of product management and ESG at Research Affiliates, in a recent interview with ETF Stream.

The US iteration of the strategy has booked steady early inflows of around $26m since its launch just over one month ago, according to Trackinsight data.

Polychronopoulos noted that some advisors are even using it as a completion portfolio, linking it with an S&P 500 fund to add back exposure to the stocks deleted from the index.

Explaining why Research Affiliates chose to launch this particular strategy directly, rather than partner with an ETF issuer with wider distribution capabilities, the firm said this was because internally the idea was seen as somewhat ‘niche’.

“We are surprised by the reception it has received from the press and advisors in the US,” Polychronopoulos added.

“Going forward, our business model remains the same. When we come up with big, bold and broad new ideas, we want to partner with affiliates to distribute those products.”

Product ideas with a more niche appeal may well be self-launched in the future, however.