3 funds for hardcore contrarians

These ETFs are benchmarked to extremely out-of-favor foreign markets that most investors would quickly pass over. Whoever said being a contrarian was easy?

By MSN Money Partner 1 hour ago
Image: Globe with money © PhotoAlto/SuperStockBy Mark Hulbert, MarketWatch

Do you do more than just talk the talk about being a contrarian investor, but actually walk the walk? Here’s a way to find out: Would you invest in the stock markets of Greece, Argentina or Russia?


I can hear the cries of anguish: You mean contrarian investing means risking your assets in the stock markets of countries that are in as awful shape as those of these three?


Greece is still a basket case, and Argentina is struggling with a currency crisis. The Russian economy, already in shambles, could face international sanctions and isolation over its aggressive behavior in Ukraine and, as a result, suffer an even more serious downturn.


But whoever said being a contrarian was easy? What do you think Nathan Rothschild meant when he famously said in the late 1800s that the time to buy is when there’s blood in the streets?


It always feels better buying something that everyone else is buying too. That is why John Maynard Keynes said most of us would rather fail conventionally than succeed unconventionally.


One contrarian who is willing to invest in Greece, Argentina and Russia is Mebane Faber, portfolio manager at Cambria Investment Management. He is focusing on those countries because of his use of the modified price-to-earnings ratio championed by Yale University’s Robert Shiller. That version divides price by average inflation-adjusted earnings over the trailing 10 years -- an indicator sometimes known as the Cyclically-Adjusted Price Earnings ratio, or CAPE.


The CAPE is what Shiller and Harvard’s John Campbell employed in the late 1990s to declare the U.S. stock market to be irrationally exuberant. Though they were early, they were, of course, right on the money.


What Faber has done is calculate a CAPE for each of the 55 most liquid stock markets around the world. The most overvalued market today, according to Faber’s calculations, is Denmark, with a CAPE of 29.2. The U.S. market isn’t far behind, in 52nd place at 25.4.

The country whose market has the lowest CAPE, according to Faber, is Greece, at 4.3. Argentina is at 6.3, and Russia 6.5.


Note that, for those three stock markets to outperform the NYSE, their economies don’t have to perform outstandingly, either in their own right or relative to the U.S. economy. All they have to do is beat expectations, which are about as low as you could imagine. For U.S. equity bets to work out, in contrast, corporate earnings need to grow faster than the already-high expectations that investors have embedded in current stock prices.


When looked at from this perspective, Faber’s wager doesn’t seem that much of a stretch.

A good analogy for making this point is from horse racing: Imagine a race track that allows you to bet on any of the finishers in a 10-horse race: One horse is a crowd favorite widely expected to win, while another is widely expected to come in dead last. Imagine further that the crowd pleaser ends up finishing second, while the unpopular horse ends up coming in seventh.


In such a case, believe it or not, you would most likely end up making more money by betting on the horse that came in seventh than the one that came in second.


Anyway, there are exchange traded funds that are benchmarked to each of the three out-of-favor foreign markets, including the Global X FTSE Greece 20 ETF (GREK), the Market Vectors Russia ETF Trust (RSX), and the Global X FTSE Argentina 20 ETF (ARGT). 


Another way of making a contrarian bet on those countries is through a new ETF that Faber launched in March. Called the Cambria Global Value ETF (GVAL), it is divided among stocks in the 11 countries with the lowest CAPEs.


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1Comment
1 hour ago
avatar
good article.  another way to go is the inverse multiplier funds and ETF's.  examples are bearx (no multiplier), ucpix, urpix, uxpix, uvpix, and the Rydex funds.  caution - see your financial advisor before opening any of these books of matches ....
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