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7 Beaten-Down ETFs for Contrarian Investors to Consider

Barbara Friedberg

A good way to profit when the market bounces back.

With the year-to-date decline in the S&P 500 hovering between 20% and 25% and an uncertain future ahead, buying beaten-down exchange-traded funds is one way to find profits during a market rebound. The silver lining of a market crash is that many solid ETFs are hurt due to temporary, not fundamental causes. "We are not currently increasing equity in our portfolios but recognize there will be an opportunity to do so over the next few months, so we are preparing our playbook in advance," says Celia Cazayoux, senior vice president at People's United Advisors in Vermont. Along with many financial experts, Cazayoux is poised to invest in beaten-down ETFs over the coming months. The following ETFs are great candidates for contrarian investors seeking gains amid the current market crash.

iShares Edge MSCI USA Value Factor ETF (ticker: VLUE)

Value stocks have been out of favor for a while. It's important to realize that despite their historical outperformance, value stocks can underperform for long periods of time. David Trainer, CEO at New Constructs posits that the companies within VLUE have strong cash flows, attractive valuations and might offer a favorable risk versus reward profile. For investors who abide by a value investing philosophy, this large-cap, sector-weighted fund targets stocks with the lowest valuation in each sector. The fund mirrors the MSCI USA Enhanced Value Capped Index. With a 3% yield and 0.15% expense ratio, investors obtain a decent return for a low management fee. The top five holdings of the tech-heavy fund include Intel (INTC), AT&T (T), Micron Technology (MU), IBM (IBM) and Pfizer (PFE).

U.S. Global Jets ETF (JETS)

Another ETF for contrarians to consider, JETS offers exposure across major global airlines, airline operators and airline manufacturers, and it tracks the performance of the U.S. Global Jets Index. JETS is down roughly 60% this year, with global travel nearly halted due to COVID-19 restrictions. "We will no doubt go back to traveling. The airlines globally are getting a bailout and manufacturing in the U.S. could see a boost when the coronavirus finishes sweeping through," says David Waslen, CEO of HedgeTrade. The fund includes small-, mid- and large-cap companies, with its top 10 holdings represented by most of the major U.S.-based airlines. The industry should recover when the coronavirus is under control and the economy rebounds, Waslen says.

First Trust North American Energy Infrastructure Fund (EMLP)

Tickeron, an artificial intelligence platform, predicts that the energy-focused fund has a 73% chance of continuing to trend upward, according to the company's CEO Sergey Savastiouk. Additionally, with the energy sector trading at 10-year lows, it's likely that when the economy picks up, so will the energy sector. The energy infrastructure fund invests in publicly traded master limited partnerships and limited liability companies involved in pipelines, power transmission, petroleum and natural gas storage and power generation. The fund spans both the utilities and energy sectors. Its top five holdings include TC Energy Corp. (TRP), Enterprise Products Partners (EPD), Kinder Morgan (KMI), Public Service Enterprise (PEG) and NextEra Energy Partners (NEP). The fund's current 4.01% yield might compensate for the short-term uncertainty within this industry.

VanEck Vectors Gold Miners ETF (GDX)

Investors who like the idea of investing in gold during times of economic uncertainty might consider GDX. The fund attempts to mirror the price and yield performance of the NYSE Arca Gold Miners Index. The fund invests in gold and silver mining companies. Unlike physical gold, GDX offers a dividend of 0.72%, slightly greater than the 0.52% expense ratio. Investors take comfort in owning gold when there's trouble in the market. GDX could more than double its value, and the "safe haven status of gold could possibly propel gold mining stocks beyond all historical markers," Waslen says. The top five holdings include Newmont Corp. (NEM), Barrick Gold Corp. (GOLD), Franco-Nevada Corp. (FNV), Wheaton Precious Metals (WPM) and Kirkland Lake Gold (KL). This ETF has already rebounded somewhat from its March lows and is currently down roughly 10% year-to-date.

First Trust Natural Gas ETF (FCG)

Steven Jon Kaplan, CEO of True Contrarian Investments, likens this market to a buffet of value ETF opportunities. He recently bought FCG because it is the lowest inflation-adjusted price for crude oil since the Great Depression. Additionally, the energy sector has recently experienced high levels of insider buying, a sign of confidence, Kaplan says. Down around 60% this year, this natural gas index fund invests in companies that obtain their revenue from the exploration and production of natural gas. The 4.55% yield compensates shareholders waiting for a market rebound. This is one of the riskiest contrarian ETFs, with investments in 33 total companies. Its top holdings include Cabot Oil & Gas Corp. (COG), EQT Corp. (EQT), ConocoPhillips (COP), Cimarex Energy (XEC) and Concho Resources (CXO).

iShares Russell 2000 ETF (IWM)

Down nearly 33% this year, this contrarian ETF represents the U.S. small-cap sector. Cazayoux believes that this type of small-cap fund might outperform when the market rebounds. She mentions that, historically, small-cap stocks best large-caps when coming out of a bear market. IWM tracks the Russell 2000, which measures the performance of the 2,000 smallest caps among the largest U.S. stocks and weights them by market capitalization. Over long periods of time, this swath of the stock market has outperformed the total stock market returns -- much like value stocks. But this hasn't been the case in the last 20 years. On a positive note, the fund's 21% exposure to the health care sector may benefit from increasing interest in scientific treatments for disease. For investors confident in smaller U.S. companies, IWM is a low-cost way to invest in this sector.

SPDR S&P 500 ETF Trust (SPY)

If you're more of a conservative than a contrarian investor, you might stick with this broadly diversified S&P 500 ETF. Although not a niche fund, it's a certainty that when the market rebounds, SPY will participate. The S&P 500 includes large-cap firms representing 80% of the U.S. market. This fund includes many global firms with strong competitive advantages. SPY has outperformed much of the world markets in recent times and bested its category peers every year since 2010. With a 0.09% expense ratio and 2.25% yield, investors will benefit from a decent dividend payment and capital gains when markets rebound. This tech-heavy index ETF counts well-known names among its top five holdings: Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Facebook (FB) and Berkshire Hathaway (BRK.A, BRK.B).

ETFs for contrarian investors:

-- iShares Edge MSCI USA Value Factor ETF (VLUE)

-- U.S. Global Jets ETF (JETS)

-- First Trust North American Energy Infrastructure Fund (EMLP)

-- VanEck Vectors Gold Miners ETF (GDX)

-- First Trust Natural Gas ETF (FCG)

-- iShares Russell 2000 ETF (IWM)

-- SPDR S&P 500 ETF Trust (SPY)

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