The Contrarian ETF portfolio began as a bit of an experiment in 2011. The idea is to purchase asset classes that have had multiple down years in a row. The hope is that returns will revert to the mean and the underperforming asset classes will outperform in the subsequent year, as Mebane Faber lays out in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.
Despite the underperformance (especially in 2011) of my interpretation of the strategy, the logic behind the strategy deserves attention and further refinement. 2012 was a better year for the test portfolio with performance listed below for each security. To see what I wrote regarding the strategy at the beginning of 2012 click here. For an update on some contrarian individual country ideas for 2013, see Mebane Faber's recent post here.
As a whole, the average return of the four contrarian securities was just under 7% for 2012, closer to 8% when dividends were included. If LSC is excluded, then the average returns for the portfolio would have been significantly higher. Is excluding LSC data mining? Yes, although LSC is an ETN and represents a futures strategy, not an asset class like the other three ETFs listed. For 2013, I will be excluding ETFs which do not represent a well-defined asset class.
The 2012 list and performance:
|Name||Ticker||1/3/2012 Open||12/31/12 Close||Returns excluding dividends|
|Global X China Financials ETF||CHIX||10.67||13.66||28.02%|
|ELEMENTS S&P Commodity Trends Indicator ETN||LSC||7.22||5.77||-20.08%|
|WisdomTree Japan Total Dividend||DXJ||31.76||36.88||16.12%|
|WisdomTree International Utilities||DBU||18.08||18.4||1.77%|
Please see below for 2012 benchmark comparisons:
|Misc Benchmarks||Ticker||1/3/2012 Open||12/31/12 Close||Returns excluding dividends|
|SPDR S&P 500||SPY||127.75||142.52||11.56%|
|AdvisorShares Cambria Global Tactical||GTAA||23.35||24.31||4.11%|
|iShares MSCI EAFE||EFA||50.51||56.82||12.49%|
|Vanguard Total Bond Market ETF||BND||83.43||84.03||0.72%|
|S&P Growth Allocation Fund (60/40)||AOR||31.42||33.97||8.12%|
|S&P Aggressive Allocation Fund (80/20)||AOA||33.64||37.17||10.49%|
For the 2013 portfolio, I searched for ETFs with three consecutive down years. I limited each ETF to one per industry/sector. For example, several solar and alternative energy ETFs were down 2-3 years in a row, but limited the portfolio to one ETF in this industry. Also, multiple agricultural ETFs had 2 down years in a row but I selected the most liquid and broad-based ETF, DBA.
The list for 2013 is below. There is a clear theme; energy and commodities have struggled the past 2-3 years and could be set to reverse course. Also of note is the Bullish U.S. dollar ETF made this year's list:
|3 Down Years in a Row|
|PBW||PowerShares WilderHill Clean Energy|
|USO||United States Oil Fund LP|
|UUP||PowerShares DB U.S. Dollar Index|
|2 Down Years in a Row|
|XME||SPDR S&P Metals & Mining|
|REMX||Market Vectors Rare Earth Strategic Metals|
|URA||Global X Uranium Equities|
|KOL||Market Vectors Global Coal|
|ENY||Claymore SWM Canadian Energy Income|
|((NYSEARCA:DBA))||PowerShares DB Agricultural Commodities|
|BZF||WisdomTree Brazilian Real Currency|
The inclusion of XME, REMX, and URA does create some cross-over in the mining sector. However, REMX and URA are concentrated on unique industries and the ETFs are liquid enough that I believe they warrant tracking along with XME.