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The Contrarian Approach to Smart Beta ETFs


Contrarian investing often means a departure from investors’ comfort zones, but patient and disciplined investors can profit from contrarian viewpoints. Smart beta exchange traded funds, including those that are fundamentally weighted, can help advisors and investors establish contrarian views without taking unnecessary risk.

On the webcast What is Comfortable is Rarely Profitable: Exploring the Principles of Contrarian Investing, which is scheduled for Thursday Nov. 20 at 4 PM Eastern time, Invesco PowerShares Vice President of ETF Product Management John Feyerer and Research Affiliates Chairman and CEO Rob Arnott will discuss the advantages and application of contrarian investing while honing in on actionable ideas for today’s market. Arnott will also provide his market outlook for 2015.

Illinois-based PowerShares, the fourth-largest U.S. ETF issuer, is one of largest (and oldest) sponsors of smart beta ETFs, a corner of the ETF market that is rapidly growing among advisors and institutional investors. Institutional growth has particularly been a major driver in smart-beta adoption – non-market cap weighted ETFs, which represent 19% of overall ETF assets, attracted over 29% of U.S. equity ETF inflows over 2013. [Big Investors Moving Into Smart Beta ETFs]

In a recent ETF Trends survey, two-thirds of advisors polled said they are using smart beta ETFs to reduce portfolio volatility and increase performance.

Fundamentally-weighted ETFs such as the PowerShares FTSE RAFI US 1000 Portfolio (PRF) , which turned nine earlier this year, are expected to be significant drivers of smart beta ETF growth. Fundamentally-weighted ETFs can also help advisors in their efforts to make selective contrarian calls. [Institutions Love Smart Beta ETFs]

PRF tracks the FTSE RAFI US 1000 Index, which selects stocks based on book value, cash flow, sales and dividends, has topped the S&P 500 and Russell 1000 Index by an average of about 400 basis points over the past three years.

The $4.25 billion PRF has been successful in part because the underlying index eschews large allocations to glamor stocks that while popular among investors are also likely to be richly valued. Investors have added $1.23 billion in new assets to PRF over the past year, making it the top asset gatherer among all PowerShares ETFs, according to issuer data.

Advisors can also use a fundamentally-weighted approach to taking a contrarian view of emerging markets. ETFs tracking developing world equities have been vexing propositions over the past several years, prompting many advisors to underweight emerging markets in favor of the comfort and perceived safety of U.S. stocks.

With stocks in developing economies deeply discounted relative to their U.S. peers, disciplined investors can make long-term contrarian bets with an ETF such as the $360.8 million PowerShares FTSE RAFI Emerging Markets Portfolio (PXH) .

Like PRF, PXH is a fundamentally-weighted ETF focusing on the virtues of book value, cash flow, sales and dividends. China, the largest emerging markets dividend payer in dollar terms, accounts for nearly 24% of PXH’s weight.

Despite tumbling currencies, Brazil and South Africa have been able to muster positive dividend growth over the past year. Those countries combine for 26% of PXH’s weight. [EM Dividends on the Rise]

PXH offers more in the way of contrarian points and discounted valuations. The ETF features a 9.5% weight to Russia where the benchmark Micex Index trades at less than half the price-to-earnings ratio of the MSCI Emerging Markets Index. At the end of the third quarter, the FTSE RAFI Emerging Markets Index traded at half the P/E of the FTSE RAFI US 1000 Index, indicating that emerging markets stocks could be well-positioned for superior long-term returns.

Financial advisors who are interested in learning more about contrarian investing with fundamentally-weighted ETFs can register for the Thursday Nov. 20 webcast here.