Contrarian vs. Momentum ETFs: Some Surprising Results

by: Gary Gordon

Six months ago, the pervasive commentary surrounding stock assets involved ”coming too far, too fast.” Yet the nay-saying didn’t stop there.

Financial stocks were supposed to buckle because few institutions were lending. Discretionary stocks were supposed to crater because consumers were still deleveraging in a poor job environment. And REITs? They were suspect due to everything from residential foreclosures to empty commercial buildings.

Nevertheless, a contrarian investor in October of 2009 might have looked at the world a little differently. He/she couldn’t join the “too-far-too-fast” crowd by shorting stocks. Yet he/she couldn’t buy into the idea that the dollar was terminally sick either.

Instead, contrarian thinkers posed different types of questions. For instance, if the dollar were to get stronger such that the U.S. economy is seen as stronger… what types of companies would gain the most? If job growth were genuinely coming, in spite of dire predictions of a jobless recovery, what types of companies would benefit? If the U.S. government achieves its aim to stabilize real estate as well as increase confidence in the banking system… what types of companies would gain the most ground?

Perhaps surprisingly, Contrarian ETFs have been the biggest winners over the last 6 months:

Contrarian ETFs 10/21/2009-4/20/2010
Approx 6-Month %
SPDR KBW Regional Banking (NYSEARCA:KRE) 31.0%
First Trust NYSE Biotech (NYSEARCA:FBT) 30.5%
SPDR Semiconductor (NYSEARCA:XSD) 27.5%
Vanguard REIT (NYSEARCA:VNQ) 25.5%
Vanguard Consumer Discretionary (NYSEARCA:VCR) 25.0%
Click to enlarge

In contrast, ETFs with all of the momentum from April 09 to October 09 related to an increasing demand for resources. The buzz term, “infrastructure ETF,” meant that the world needed oil, steel, aluminum, copper, water… and the miners as well as energy producers to get at those materials. Even more attractive to momentum riders, the dollar had steadily declined, boosting commodity prices.

Unfortunately, the previously powerful Momentum ETFs in the materials/mining/infrastructure complex have petered out over the last 6 months:

Momentum ETFs 10/21/2009-4/20/2010
Approx 6-Month %
Market Vectors Gold Miners (NYSEARCA:GDX) -2.8%
iPath Dow Jones AIG Total Commodity (NYSEARCA:DJP) -0.5%
iShares DJ Energy (NYSEARCA:IYE) 2.0%
Utilities HOLDRS (NYSEARCA:UTH) 2.5%
Market Vectors Hard Asset Producers (NYSEARCA:HAP) 4.5%
Click to enlarge

Of course, being contrarian doesn’t always work. For that matter, what’s a true contrarian right now? Is it bearishness or bullishness? Is it rotating into the sectors that few seem keen on, like energy and materials? Or would it be going against the short sellers who are deeply committed to shorting financials, retail as well as real estate investment trusts?

Certainly, a case could be made that you’re acting in a “contrary” fashion if you continue buying banks, REITs, retail… and all of the winners from the previous 6 months. Yet I view a contrarian as anyone who looks at the current news and thinks, “What if it doesn’t happen like that at all?”

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company receives advertising compensation at the ETF Expert web site from Invesco PowerShares Capital Management, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.