JCO: Investing In The Contrary

April 9, 2010 by  
Filed under Commentary, ETF IPOs (New ETFs), ETFs

Those who like fishing for value may find JETS Contrarian Opportunities Index Fund (JCO) to be a useful tool.  Launched today (4/9/2010) by the relatively new provider Javelin, JCO will attempt to track the Dow Jones U.S. Contrarian Opportunities Index, a rules-based portfolio of low-performing stocks that pass several tests of fundamental strength.

According to its press release, Dow Jones has backtested the index on a monthly basis back to 12/31/91.  Annualized return from that point to the present is more than 21%.  It does not necessarily follow that a real-world portfolio would have had such impressive results, of course.  Nonetheless the strategy is interesting.  The selection process begins with the 2,500 largest U.S. stocks, ranked in order of trailing three-year performance.  The best-performing 1,250 are removed from consideration.  The smallest capitalization stocks are then removed and the survivors are ranked by ten fundamental indicators, such as earnings, profit growth, etc.  The top-scoring 125 stocks make it into the index and are equally weighted.

In other words, the goal is to own stocks with a solid underlying business that have lagged the market in terms of share price over the last three years.  The index is reconstituted twice a year, which means stocks that pop up from the bottom will probably be removed a few months later.  This provides a sell discipline.  Sector weightings are capped at 30%; currently the Consumer Services sector is bumping up against that limit.

Top index holdings as of 3/31/2010 were:

  • Zumiez (ZUMZ)
  • Psychiatric Solutions (PSYS)
  • Finish Line (FINL)
  • Centene (CNC)
  • Philips-Van Heusen (PVH)
  • AMERIGROUP (AGP)
  • Volcom (VLCM)
  • Red Robin Gourmet Burgers (RRGB)
  • Williams-Sonoma (WSM)
  • Akamai Technologies (AKAM)

All the above are currently weighted around 1% of the index or less. Average market cap in the portfolio is $4.4 billion and median market cap only $1.5 billion, so this is mostly a small-cap fund.

JCO is the second ETF from Javelin.  The firm rolled out Javelin Dow Jones Islamic Market International Index Fund (JVS) last summer.  JVS assets currently total less than $3 million, so the firm is clearly not a marketing powerhouse.  It remains to be seen whether JCO will have better luck.  JCO is expected to have an annual expense ratio of 0.58%.

JCO summary page

JCO fact sheet (PDF)

JCO prospectus (PDF)

Index overview

Disclosure covering writer, editor, and publisher: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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