Morningstar Unveils ‘Most Unloved’ ETF Portfolios Based on Mutual-Fund Flows

Portfolios expose investors to unpopular categories likely to outperform the stock market

Morningstar Investment Services on Thursday launched the Contrarian ETF strategies, a group of three exchange-traded-fund portfolios that provide exposure to the “most unloved” mutual-fund categories in Morningstar’s database, as measured by asset outflows.

The fee-based discretionary investment management program is offered solely through financial advisors, according to Morningstar’s news release.

The Contrarian ETF portfolios build on Morningstar “Buy the Unloved” study, which examines the predictive value of mutual-fund asset flows. The study, first published in 1994 and updated annually, has found that unpopular categories are more likely to outperform the broad stock market over subsequent periods than popular categories, suggesting that outflows are a useful contrarian signal.

“Research has shown that contrarian investing is a proven way to enhance portfolio diversification and capitalize on compelling opportunities,” said Jeffrey Ptak, president and CEO of Chicago-based Morningstar Investment Services(MIS), an entity of Morningstar’s Investment Management division, in a statement. “Our new Contrarian ETF portfolios build on Morningstar’s research to automate contrarian investing, using mutual-fund flows as a contrarian signal. They’re an inexpensive, efficient way for investors to go against the grain.”

Morningstar’s three contrarian ETF portfolios—Contrarian, Contrarian and Income, and Contrarian and Growth—invest at least a portion of their assets in ETFs that mirror the five most-unloved categories of the past five calendar years.

  • The Contrarian portfolio invests all of its assets in unloved categories.
  • The Contrarian and Income portfolio invests half of its assets in unloved categories and the rest in a mix of diversified bond ETFs.
  • The Contrarian and Growth portfolio invests half of its assets in unloved categories and the rest in a mix of diversified stock ETFs.

Read “ICI Conference: Morningstar's Don Phillips Talks to AdvisorOne About Industry Trends” at AdvisorOne.com.

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