Everyone likes to say they are a contrarian investor, but by definition that can’t be the case. The truth is that most of us prefer to go along with the crowd — not only do we find comfort in the social confirmation of other investors making the same decisions we are, but it is actually a smart investment move most of the time.
This might not seem obvious, but actually, the herd is right most of the time.
Still, there are times when leaning against the tide can reap rewards for patient investors.
Contrarians typically invest in the unloved and scary. They go where the herd isn’t, diving into areas of the market that are underperforming, and when whole markets themselves are cloaked in negativity. If putting your money to work in the markets when all the headlines tell you you’d be a fool to do so makes you pause, then the following three ETFs are not for you.
But, if you revel in forging your own course, here are three Vanguard ETFs covering areas of the market worth your consideration.
(Note: I don’t know your personal investment situation, so do not take these as a blanket buy recommendation. These are ideas for you to learn more about. The ultimate decision to invest, or not, lies with you.)
Vanguard ETFs for Contrarians: Vanguard Health Care ETF (VHT)
Expenses: 0.09%, or $9 per $10,000 invested annually
In the 12 months ending in July, Vanguard Health Care ETF (NYSEARCA:VHT) was down 2.6%, making it the worst-performing sector ETF in Vanguard’s stable, and putting it well behind Vanguard S&P 500 ETF’s (NYSEARCA:VOO) 5.5% gain.
While an investor favorite just a year ago, the threat of government regulation and heated rhetoric from the presidential campaign trail has led investors to sell the health care sector en masse. Over the past year investors have pulled nearly $1 billion from the Vanguard Health Care ETF (tallying up all of the fund’s share classes) and another nearly $6 billion from the actively managed Vanguard Health Care Fund (MUTF:VGHCX).
In the prior year, investors poured $5.4 billion into Vanguard’s two health care funds.
Yes, politics have heightened the uncertainty around the healthcare sector, but this is a story that has played out before. When politics and regulation enter the picture investors sell their healthcare stocks assuming the worst. That’s what happened with the introduction of the Affordable Care Act in 2011.
But the reality is that regulation and new laws just create winners and losers, it doesn’t spell doom for the sector as a whole.
While healthcare is under pressure in the near-term, the long-term story of demographics, globalization and new technologies and drugs remains as compelling as ever.
Vanguard ETFs for Contrarians: Vanguard FTSE Emerging Markets ETF (VWO)
Expenses: 0.15%
You might be wondering how an ETF that gained 13.2% in the first seven months of the year could possibly be considered a contrarian pick?
Well, let’s extend our time horizon a bit.
Over the past three years, Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) lost 0.65% and is down a total of 8.2% over the past five years. In contrast Vanguard S&P 500 ETF gained 10.1% and 85.8% over the past three and five years, respectively.
Like healthcare stocks, emerging-market stocks were once darlings. But since 2012, investors have pulled over $11 billion from the portfolio. Slowing growth in China. Corruption and recession in Brazil. Turmoil in the Middle East. Aggression out of Russia. The headlines out of emerging markets have not been comforting, and a strong dollar hasn’t helped returns.
Given the level of apathy, if not outright negativity, investors seem to have for the emerging markets, I would say that even a small glimmer of good news could put the wind behind emerging markets’ sails.
The recent strong performance of VWO suggests that we may have already reached the turning point but investors haven’t fully caught on yet.
Vanguard ETFs for Contrarians: Vanguard FTSE European ETF (VGK)
Expenses: 0.12%
European stocks have very nearly had their own lost decade. Over the past ten years Vanguard FTSE European ETF (NYSEARCA:VGK) has only advanced at an annualized 2.3% pace, and that includes dividends!
Today’s common wisdom is that with Great Britain voting to go their own way, the European Union faces existential questions. Is Brexit a one-off, or was it just the first domino to fall, leading to the E.U.’s eventual dissolution?
I don’t know how the European Union will fare in the years ahead — whether it will emerge stronger or ultimately fall apart — but I do know that companies will continue producing goods and services, countries will trade and entrepreneurs will start new businesses.
It will take patience and a strong stomach, but like the emerging markets, the situation in Europe doesn’t need to find a perfect resolution for Vanguard FTSE European ETF to generate gains — it just needs to stop deteriorating.
Editor/Research Director Jeffrey DeMaso helps publish The Independent Adviser for Vanguard Investors, a monthly newsletter that keeps abreast of recent developments at Vanguard, and the annual FFSA Independent Guide to the Vanguard Funds.
