A Simple Way to Be a Contrarian Investor

Journal of Financial Planning; May 2014


Matt Hougan is president of ETF Analytics and global head of editorial for IndexUniverse, where he oversees content and spearheads its efforts to reshape the way investors analyze ETFs.

A lot of new ETFs that launch are junk. They occupy space, distract attention, and provide pointless exposures that investors shouldn’t want and definitely don’t need.

But sometimes a niche fund with a creative idea comes to market that makes sense. One that caught my eye is the Cambria Global Value ETF (GVAL), which hit the market in March and charges 0.69 percent in annual expenses.

The fund’s methodology is simple: It looks at 45 different countries and buys 11 of them trading at the cheapest long-term valuations. Think of it as the “Unloved 11 ETF.”

The resulting portfolio is interesting. The table compares the top 11 country positions of GVAL with those of a global benchmark, the iShares MSCI ACWI ETF (ACWI).

GVAL is full of the dogs of the world—countries that no one wants to touch right now. We’re talking Brazil, Greece, Russia, and the like; countries that have P/E ratios in the single digits in some cases. ACWI, by comparison, is basically a play on the United States, Japan, and Western Europe, and has a P/E ratio of 17+.

So what’s to like about GVAL? Simple: It makes being a contrarian investor easy.
Brazil, for instance, is a horrible thing to buy (as of this writing in early April). The market is down 10 percent for U.S. investors over the past year, and investors are yanking money out left and right. Inflation is rampant, World Cup preparations are behind, and crime is rising. Greece is Greece. And don’t even get me started on Russia.

If you think too much about any of these investments, you will talk yourself out of making them. There are too many reasons to say “no.” That’s why contrarian investing works. It’s hard to think about Russia and Vladamir Putin and Crimea and Khordorkovsy and say, “You know what? I’m going to put my money there.

You’re more likely to just buy the S&P 500, especially when it’s the best-performing index in the world.

But if you put a bunch of these fallen angels into a single portfolio and wrap it in an innocuous name like “Global Value,” it becomes palatable. You’re not buying Russia; you’re buying value. You’re not investing alongside Vladamir Putin; you’re putting your money on Graham and Dodd.

I wouldn’t bet the farm on something like GVAL. It’s more expensive than most internationally focused plain vanilla equity ETFs, and in a risk-sensitive world it could perform terribly. It’s also relatively illiquid at this stage. 

But as a satellite exposure to add a contrarian bent to your equity portfolio? I think it’s interesting and well-designed, and could be a fit.

At the time of writing, Hougan held no positions in the ETFs mentioned here.

Investment Planning