I’ve known lots of chartists over the years who swear by price momentum and the saying, the ‘trend is your friend’. Simply, they buy rising stocks and sell falling ones based on price momentum rather than company fundamentals.
This strategy might work sometimes for savvy traders and active investors. For long-term portfolio investors, however, chasing stocks higher rarely ends well. Nor does selling stocks when they trade below fair value.
A different mindset is needed. In my experience, the best investors are prepared to buy and hold deeply unpopular stocks or funds in out-of-favour sectors.
That’s not to say the only buy ideas are in fallen assets. Sometimes the best ideas are in rising stocks where the market continually underestimates earnings growth. JB Hi-Fi and REA Group, which against starred this profit season, are examples.
What matters is company valuation, not market sentiment. If anything, it’s sentiment that creates opportunity when markets are too bullish or bearish.
With that in mind, I’ve analysed the market’s worst-performing Exchange Traded Funds (ETFs) on the ASX. Using Morningstar data and tools, I’ve ranked 425 ETFs from worst to best returns over 12 months to 13 August 2024.
My goal: to identify ETFs that have been hugely out-of-favour in the past 12 months and ideally over the last three years. Also, to understand which sectors, themes or trends are attracting most capital and outperforming.
It’s an interesting exercise that should be done at least half-yearly. With global equity markets still in sight of their record highs (despite last week’s sell-off), hunting for value in out-of-favour sectors is even more important.
Green metals and clean energy ETFs dominate the worst performers over 12 months, Morningstar data shows. So, too, inverse ETFs that provide leverage to falling US equity markets – a disastrous view given rising markets there.
By my count, at least 12 of the 20 worst-performing ETFs over 12 months are clean-energy-related. That’s despite trillions of dollars being invested globally into decarbonisation and the renewables transition, amid climate change.
Clean-energy stocks have been hit by a confluence of problems. Higher interest rates, a slowing global economy, rising competition in renewables from China, the prospect of Donald Trump, a climate sceptic, as US President … the list goes on.
Nobody said contrarian investing is easy. For many investors, the best ideas are often the hardest to buy and hold, given extreme bearish sentiment. It’s far easier to buy popular stocks and funds along with the market herd, even though that risks owning overvalued assets and destroying wealth.
Here are two ETFs that suit contrarian investors who understand the risks of investing in deeply out-of-favour sectors. Such investors need patience, for a recovery will not be quick or easy. They also need higher risk tolerance, knowing that further short-term price volatility and losses are possible.
Caveats aside, these ETFs look oversold:
- Global Battery X Tech and Lithium ETF (ASX: ACDC)
ACDC was one of the market’s hottest ETFs when it launched in August 2018. The cleverly named ETF invests in companies throughout the lithium cycle, from upstream producers to downstream refineries and battery producers.
The ETF’s launch coincided with rising interest in green-metals producers and, later, the boom in lithium stocks as the lithium price soared in 2021 and 2022. ACDC rallied from about $43 in early 2020 to about $100 in mid-2023, such was investor euphoria towards battery technology and materials companies.
When the lithium price plunged last year, ACDC sank to $76,30. Over 12 months, the ETF is down about 22% in price terms. It’s now back to its level of almost two years ago, such has been the sell-off in lithium-related stocks.
Predictably, key lithium producers have announced plans to curtail current or future supply in response to the depressed lithium price. It will take time, but lower supply in the context of rising lithium demand due to the growth in Electric Vehicles (EVs) will lay the foundations for a lithium price recovery this decade.
Investors who missed the rally in lithium first time around could consider ACDC, which provides concentrated exposure to 34 global lithium-related companies. Only 22% of the ETF is invested in lithium materials producers, which is where the best opportunities probably are at current valuations.
Chart 1: Global Battery X Tech and Lithium ETF
Source: Google Finance
- BetaShares Electric Vehicles and Future Mobility ETF (ASX: DRIV)
Closely related to falls in green metal prices is slower-than-expected growth in sales of EVs. Four factors best explain disappointing sales growth for EVs. First, falling prices for used EVs have spooked prospective purchasers.
Second, recurring concerns about a lack of rapid station charging infrastructure and the driving range of EVs are rising. The EV boom is well entrenched, yet charging infrastructure is not as advanced by now as many expected.
Third, political and regulatory uncertainty is weighing on EV demand. A Trump presidency in the US, for example, could result in less favourable policies to encourage EV take-up.
Trump’s strident criticism towards EVs has been recently tempered to gain the endorsement (and donations) from his new best friend, Tesla’s Elon Musk. But policy uncertainty remains a headwind for prospective EV purchasers.
Finally, hybrid vehicles are proving more competitive with all-electric vehicles than expected. Hybrids deliver fewer environmental benefits than EVs but cost less and don’t have the same risks with charging infrastructure and driving range.
DRIV has been caught up in this negativity. In price terms, the ETF is down around 20% over 12 months. The ETF traded at almost $12 in late 2021. Now it’s at $7.62.
DRIV provides exposure to 50 global companies at the forefront of automotive technology, including Tesla and Volvo, and semiconductor manufacturers.
Without doubt, the EV boom was overhyped by industry promoters, governments and sections of the media. US President Joe Biden set an overly ambitious target for 50% of all new passenger vehicle sales in the US to be electric by 2030.
Clearly, the market got too far ahead of itself with EV demand. But despite the negativity, almost 14 million EVs were registered globally in 2023, bringing the total number to almost 40 million, International Energy Agency (IEA) data shows.
EV growth will be slower than the market first thought, but the IEA still expects ‘robust growth’ as the EV market matures. The EV trend has a long way to run as more people switch from traditional to all-electric vehicles.
Still, a recovery in DRIV could take time, amid waning sentiment towards EVs and the prospect of lower car sales as the global economy slows. For investors who can look beyond short-term bearish sentiment, there’s more to like about the EV boom this decade, given sharply lower valuations this year.
Chart 2: BetaShares Electric Vehicles and Future Mobility ETF
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 13 August 2024.
