2013 Contrarian ETF Portfolio

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 under-performing asset classes will out-perform 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 under-performance (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%
Wisdom Tree Japan Total Dividend	DXJ	31.76	36.88	16.12%
Wisdom Tree International Utilities	DBU	18.08	18.4	1.77%
			Average	6.46%

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 US Dollar ETF made this year's list:

	3 Down Years in a Row
Ticker	Name
PBW	PowerShares WilderHill Clean Energy
USO	United States Oil Fund LP
UUP	PowerShares DB U.S. Dollar Index

	2 Down Years in a Row
Ticker	Name
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
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.

This list of ETFs and their performance will be tracked on the right-hand side of Scott's Investments throughout 2013.

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