Bad Timing and ETF Launches

I've often viewed new financial product launches as a contrarian signal.  Similar to magazine covers and above-the-fold headlines, a new product often signifies that the idea behind the product has already played out. 

Since I first read Humphrey Neill's classic book The Art of Contrary Thinking, I have been fascinated by the idea of viewing crowds and markets through a contrarian lens.  As the markets have evolved, this has meant finding new and updated methods to spot a trend to possibly bet against.

Once a financial theme gets so popular that it's picked up on the cover of non-financial publications, featured above-the-fold on the front page of your favorite newspaper, or turned into an amazing new financial product, this has often marked the end of the financial theme in question.

With the number of ETFs being launched every year, it's not surprising that this pattern has been picked up by many outlets, noticing the relationship with ETF launches and subsequent underperformance.

Bearing all that in mind, imagine my glee when I saw that a new ETF had been launched a couple weeks ago called the "Decline of the Retail Store ETF."  With the ticker EMTY, this new ETF seeks to benefit from "the decline of bricks and mortar retailers."  

The ETF basically shorts an index of stocks such as The Buckle (BKE), Foot Locker (FL), Express (EXPR), and Rite Aid (RAD).

Imagine my total lack of surprise when I noticed that this basket of brick and mortar stocks is up over 11% since the ETF was launched.  The new contrarian ETF, EMTY, has underperformed the SPX by 10.7% in two weeks.

Source: Bloomberg

Source: Bloomberg

This is a similar behavioral phenomenon to performance chasing with mutual funds.  Investors love to pile into funds with the best performance, only to find that those funds tend to underperform going forward.

Why does this tend to happen?

One behavioral explanation is the representativeness heuristic, where people make decisions "based on assumptions or past experience."  You tell yourself, "This is what has been happening, so I'll assume that's what will continue to happen."

EMTY may be an exceptionally good long-term play on the growth of e-commerce and the shrinking and consolidating world of brick and mortar retail.

For now, it's simply an example of why it can pay to be a contrarian.


Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice.  Please see the Disclaimer page for full details.