Contrarian investing isn’t just a notion. It’s an actual style and like any other style, sometimes it works and there are times when it doesn’t reward investors. That is to say some of the best ETFs are contrarian ETFs that are founded upon solid contrarian ideas. However, that doesn’t mean there isn’t a fair share of disappointing contrarian styles in the mix either.
The premise here is simple: contrarians swim against the tide. Alone, that implies some degree of difficulty. Today, there are easy, stock-specific contrarian bets to identify, most of which are dangerous. For example, betting against Amazon (NASDAQ:AMZN) isn’t a good idea. Want to run out and rush to wager against tech stocks today? Probably not a good idea.
The other side of the contrarian coin is betting on names that are out of favor and there’s a bumper crop of those to pick from these days thanks to the novel coronavirus outbreak. Airlines, cruise operators and the industrial and real estate sectors all currently fit the contrarian bill.
Here are some of the best ETFs for patient investors looking to make contrarian bets before these ideas again become mainstream.
- U.S. Global Jets ETF (NYSEARCA:JETS)
- Financial Select Sector SPDR Fund (NYSEARCA:XLF)
- SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP)
- Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO)
- iShares U.S. Aerospace & Defense ETF (CBOE:ITA)
Let’s take a closer look at what makes each of these contrarian ETFs stand out from the rest of the crowd.
Contrarian ETFs to Buy: U.S. Global Jets ETF (JETS)
Expense Ratio: 0.60%, or $60 annually per $10,000 invested
Whether it’s an individual airline stock or the broader U.S. Global Jets ETF, assets attached to this industry are currently the definition of contrarian investments and that’s the case over shorter and longer time horizons.
Spend enough time on social media and you’ll find some recent pictures of packed passenger jets, but the very grim reality is that economic data simply don’t support a near-term recovery for the airline industry. The airline themselves, including JETS components, are acknowledging as much with some saying there will be jobs for just a small number of recently furloughed workers.
On a longer-ranging basis, Wall Street consensus today on airlines is that no recovery in capacity will be seen until 2022 and that it will be 2023 or 2024 before this moribund industry comes anywhere close to resembling its 2019 self. Bottom line: JETS checks plenty of boxes as one of the best ETFs for contrarian investors.
Data confirm some are buying into that idea. Year-to-date, investors allocated $708 million to JETS.
Financial Select Sector SPDR Fund (XLF)
Expense Ratio: 0.13%
Like the aforementioned JETS, the Financial Select Sector SPDR Fund — or any financial services fund for that matter — checks plenty of contrarian boxes. The advantage with XLF is that its components are much more structurally sound than airlines.
That said, the current climate is undoubtedly challenging for the bulk of the S&P 500’s third-largest sector. While the Federal Reserve is likely to resist taking interest rates into negative territory, borrowing costs near zero are eroding banks’ net interest margins and are problematic for insurance providers, another big industry component in XLF, too.
Low interest rates are one thing, but the weakening economy, is another problem and a worse one at that. Go back to some first-quarter earnings comments from the likes of JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC), just to name a few. These banks and more are setting aside more cash to deal with sour loans, an action that’s a direct result of Covid-19’s effect on the U.S. economy.
Still, this isn’t 2008-09 and banks are mostly healthy today, but investors are giving XLF the cold shoulder this year as highlighted by $1.88 billion of outflows.
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Expense Ratio: 0.35%
Oil futures are in rally mode, but the commodity is still halved on a year-to-date basis, making the SPDR S&P Oil & Gas Exploration & Production ETF, or any energy ETF for that matter, a contrarian idea. For its part, XOP’s contrarian credentials are bolstered by its intimate correlation to crude prices and its volatility. Underscoring the latter, the fund lost 10.54% last week, but is still higher by 62.62% off its March lows.
Last Friday, oil prices hit their highest levels since March, taking some of the contrarian lust offer XOP, but things may not be as sanguine as they appear in the oil market. With prices firming and data suggesting coronavirus reopenings across the U.S. are spurring drivers to hit the roads, some international producers could be ready to send more crude to the U.S.
Adding to XOP as one of the best ETFs for those willing to go against the grain is the credit market, which is speaking volumes on exploration and production companies. In a year chock full of corporate credit downgrades, E&P energy names, including some XOP components, are among the hardest hit with some even going from investment-grade to junk status.
Vanguard FTSE Emerging Markets ETF (VWO)
Expense Ratio: 0.10%
With China being the original epicenter of the coronavirus and Brazil currently being one of the world’s hot spots for the fatal respiratory illness, it’s not surprising that the Vanguard FTSE Emerging Markets ETF and other emerging markets funds don’t exactly qualify as this year’s best ETFs. But they do make excellent contrarian ETFs.
Declining oil prices, which plague VWO geographic members such as Brazil, Mexico and Russia, aren’t helping matters. Nor is India’s lack of responsiveness to those lower oil prices, which is disappointing given the country’s status as a net oil importer.
Additionally, VWO’s 19.38% rebound off its March lows is weak compared to U.S. benchmarks, perhaps prompting some investors to say “why even bother with emerging markets?”
Fortunately, there are still reasons to consider Chinese stocks and that’s meaningful because VWO allocates almost 43% of its weight to that asset class.
“As China was the first country to be devastated by the virus, it is also the first to start to recover,” said BlackRock. “While investors should always be a bit skeptical of Chinese economic data, there are credible signs that their economy is slowly beginning to improve. Currently China is about the only place in the world where manufacturing surveys are positive, indicating a tepid expansion.”
iShares U.S. Aerospace & Defense ETF (ITA)
Expense Ratio: 0.42%
Any ETF that allocates nearly 11% of its weight to Boeing (NYSE:BA), as does the iShares U.S. Aerospace & Defense ETF, is a potential contrarian idea. Underscoring Boeing’s rapid descent, there was a time when it commanded over 23% of ITA’s roster.
Making matters worse for ITA, Raytheon Technologies (NYSE:RTX), another lagging Dow Jones Industrial Average component from the out-of-favor industrial sector, accounts for 16% of the fund’s weight.
ITA could be see its contrarian credentials elevated later this year if former Vice President Joe Biden takes the White House and Democrats seize both houses of Congress, scenarios that could lead to reductions in defense spending. If both of those situations come to pass, ITA wouldn’t just be contarian. It might just be simply a bad idea, particularly if Boeing doesn’t get its house in order.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of XLF and VWO.