At the beginning of 2011 I featured a Contrarian ETF Portfolio for 2011. The idea is to purchase asset classes that have had multiple down years in a row. The hope is that returns will revert to the mean and the under-performing asset classes will out-perform in the subsequent year, as Mebane Faber lays out in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets:

“A down year two years in a row increases average returns about 4% but only happens about 10% of the time. Three negative years in a row result in median returns of about 30% a year…Extending the test to other assets classes shows similar results. When the past few years were negative, it is a good time to be in an asset class.”

At the beginning of 2011 there were very few ETFs with three down years in a row.  I noted that at least two of the ETFs on the list, GAZ and UNG, had structural issues related to contango. The third ETF on the list, JJE, was fairly illiquid.  Two other ETFs, DXJ, (Wisdom Tree Japan Total Dividend), and DBU (Wisdom Tree International Utilities) were down two of the past 3 years at the start of 2011.  LSC (ELEMENTS S&P Commodity Trends Indicator ETN) had two down years in a row so I also put it on my 2011 list.


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Thus, the 2011 did not truly capture any ETFs accurately representing an asset class with three down years, with the closest being DXJ and DBU.  I tracked hypothetical returns for a portfolio of DXJ, DBU, LSC, and JJE and excluded GAZ and UNG.  A starting hypothetical portfolio of $10,000 on 1/1/11 would have ended 2011 with a value of $8515, including dividends.  This is a loss of -14.85%, not very good when the S&P 500 via SPY finished the year down -.95% excluding dividends; however, given the international exposure in the portfolio it performed similarly to EFA (iShares MSCI EAFE), which returned -15.49% excluding dividends.

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