5 Fictional ETF Home Runs

These imaginary funds created years ago are going against the herd and hot money.

It’s easy to develop investment strategies based on what worked well in the past. Nearly eight years ago, I launched five imaginary ETFs in a CBS MoneyWatch article that I suspected would do well. Here’s how I positioned each fund at the time, how they did and three key takeaways.

1. Negative Technical Analysis ETF (Winner)
Technical analysis uses trends to try to predict the future price of a stock or the stock market itself. Since this data is available to anyone with an internet connection, following these trends is following the herd, which we all know doesn't work. So, when technical analysis says sell, my ETF would buy.

According to Morningstar, tactical allocation funds that typically use technical analysis earned 4.83% annually over the past five years ending July 20, 2017, or about 3.90 percentage points annually less than a 2035 target-date fund that kept allocations relatively consistent. Thus, doing the opposite would have bested the market.

2. Sane-Money ETF (Winner)
I've noted that Jim Cramer deserves a raise for keeping the stock market efficient in his Show Mad Money. Millions of consumers have watched him and followed his advice. So my new ETF will buy what he says to sell and sell what he says to buy. We may not have CNBC behind us, but I think we can build a niche of investors who would rather think of themselves as sane than mad.

Though I didn’t launch this imaginary fund, I did make some money buying two stocks Cramer said to sell immediately. They were two of the four-best-performing S&P 500 stocks over the next year. According to MarketWatch, Cramer’s Action Plus Alerts badly lagged the total return of the S&P 500. Doing the opposite was again a winner.

3. Nonfundamental ETF (Winner)
Fundamentally weighted ETFs are run by people who think they are smarter than the market and who weight stocks in an index differently than their values (market capitalization). This method of weighting used to be red hot—until it stopped working. But it will be hot once again when my new ETF does just the opposite—overweight the largest capitalizations.

Fundamental indexing is now known as smart beta. But dumb beta made a comeback as small-cap value underperformed the market over the past five years. According to Morningstar, a large growth fund earned 1.24% annually more than small-cap value.

4. Golden Dollar ETF (Winner)
Gold was the best investment I ever made back in 1980 when I bought it at $664 an ounce and was sure it was about to become worth $2,000. It was a great teaching investment, because I learned I was merely following the herd. Today common wisdom is that gold will skyrocket and the dollar is dead. My new ETF will short gold and buy futures on the dollar, betting that conventional wisdom is usually wrong.

Over the past five years, gold is down about 20%, while the dollar has surged.

5. INDent ETF (flagship) (Jackpot Winner)
Every fund family needs a flagship product, and this will be mine. Harry Dent had launched a new ETF called the DENT Tactical ETF, which is based on his best-selling books. Those books predicted both Dow 40,000 and later, the great depression ahead, with the Dow at 3,800. His previous mutual fund, the AIM Dent Demographic Trends Fund, once had $2 billion in assets. Then it was merged into another, now extinct, mutual fund after 80% of the assets were gone.

Too bad this fund was imaginary, because I could have really made some money here. Though I keep arguing no one can be consistently wrong in predicting the market, Harry Dent keeps proving me wrong. The DENT ETF became extinct in 2012, but INDent could have used his newsletter to do the inverse.

Takeaways

First, all of my ETFs were based on doing the opposite of what was hot at the time. Following the money to what’s been hot results in following the herd, and that typically ends poorly.

Second, while ignoring what’s hot is good, doing the exact opposite can be even better. Of course there are added costs and taxes from doing this. Rebalancing is the extent I’ll go against the herd, since the herd typically buys high and sells low.

Third, these ETFs are imaginary. I’m not literally looking at what’s hot today and launching funds that do the opposite. Those funds would be exciting, and I continue to believe that investing should be dull.

Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter