If you want to know what investors are fixated on today, just look at the colorful acronyms and terms Wall Street and financial media coin.
The “Magnificent Seven,” for instance, refers to seven giants spanning the technology, communications and consumer discretionary sectors: Microsoft Corp. (ticker: MSFT), Alphabet Inc. (GOOG, GOOGL), Meta Platforms Inc. (META), Tesla Inc. (TSLA), Nvidia Corp. (NVDA), Amazon.com Inc. (AMZN) and Apple Inc. (AAPL).
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These companies are heavily involved in artificial intelligence applications and dominate the top ranks of the S&P 500 and Nasdaq-100 indexes. They are consistently among the most traded in both shares and options, widely covered by analysts, and overweight positions in both index-based and actively managed funds.
But what about the opposite? While the Magnificent Seven have undoubtedly outperformed, valuations for some are stretched and trades have become crowded. Savvy investors who prefer to buy low and sell high may instead look for opportunities where sentiment has turned negative or stayed neutral.
That is the essence of contrarian investing: identifying herding behavior — the tendency for investors to pile into the same trades — and doing the opposite.
Contrarian investing does not necessarily mean shorting the Magnificent Seven or using single-stock inverse exchange-traded funds (ETFs) or options to bet against them. A simpler approach is to pivot to areas that represent the opposite of their themes.
Instead of leaning into tech, shift toward beaten-down health care giants. Instead of focusing on growth stocks, target value names. And instead of concentrating on mega-cap leaders, look for overlooked small-cap opportunities. Whatever the preference, ETFs offer several ways to implement contrarian strategies.
Here are seven of the best contrarian ETFs to buy today:
— Direxion Nasdaq-100 Equal Weighted Index Shares (QQQE)
— Virtus LifeSci Biotech Products ETF (BBP)
— VanEck Office and Commercial REIT ETF (DESK)
— Vanguard Value ETF (VTV)
— Distillate Small/Mid Cash Flow ETF (DSMC)
— Simplify Bond Bull ETF (RFIX)
— Amplify Natural Resources Dividend Income ETF (NDIV)
Direxion Nasdaq-100 Equal Weighted Index Shares (QQQE)
“While the Magnificent Seven has delivered strong performance both collectively and individually in recent years, many investors view current valuations as stretched,” says Mo Sparks, chief product officer at leveraged and inverse ETF provider Direxion. “With these stocks now comprising nearly 45% of the Nasdaq-100, QQQE offers an equal-weight approach that balances exposure more.”
QQQE’s methodology is straightforward. Instead of giving larger companies more weight, all 100 Nasdaq-100 index constituents are reset to 1% at quarterly rebalancing. This introduces a natural buy-low, sell-high effect and reduces concentration risk in tech stocks, while still allowing investors to benefit from the Nasdaq’s reputation for innovation. QQQE charges a 0.35% expense ratio.
Virtus LifeSci Biotech Products ETF (BBP)
One of the more beaten-down industries in recent years has been biotechnology. An uncertain U.S. political environment, coupled with funding crunches, has led to nonstop layoffs as companies attempt to preserve cash. Investors, however, need to distinguish between two very different types of biotech firms: commercial and clinical. These have very different risk and return profiles.
Commercial-stage companies already have approved therapies on the market and are generating revenue, while clinical-stage firms are earlier in development with heavy cash burn as they pursue breakthroughs. For long-term investors, the former category may be more stable, and BBP is built for that role. This ETF only holds biotech companies with at least one FDA-approved drug therapy.
VanEck Office and Commercial REIT ETF (DESK)
While some corners of the real estate investment trust (REIT) sector, such as data centers, have posted significant gains, others have lagged behind. Office and commercial REITs were hit especially hard by the COVID-19 pandemic, with occupancy rates and cash flows damaged by the adoption of work-from-home policies. Recovery has been slow as some companies continue to embrace hybrid work models.
That being said, the segment now offers depressed valuations and exposure to key property markets like New York and Boston. Investors can access it through DESK, which tracks the MarketVector US Listed Office and Commercial REITs Index. DESK currently delivers a 4.2% 30-day SEC yield and charges a 0.52% expense ratio. However, the ETF has struggled to attract inflows, with only $2.4 million in assets so far.
[See: 10 Best Value Stocks to Buy Now]
Vanguard Value ETF (VTV)
The Vanguard Growth ETF (VUG) has been one of the top performing growth funds of the last decade, returning an annualized 17%. This stellar track record coupled with a rock-bottom 0.04% expense ratio has made it a darling for many growth investors. In contrast, its value-oriented and similarly cheap counterpart, VTV, has underperformed, returning a much lower annualized 11.5% over the last 10 years.
This ETF tracks the CRSP US Large Cap Value Index. Instead of overweights to technology, consumer discretionary or communications, VTV emphasizes old-economy sectors like financials, health care and industrials more. Top holdings include blue chips such as JPMorgan Chase & Co. (JPM), Berkshire Hathaway Inc. (BRK.B), ExxonMobil Corp. (XOM) and Walmart Inc. (WMT).
Distillate Small/Mid Cash Flow ETF (DSMC)
“While we’re very constructive about the small-cap universe being a great hunting ground, there is reason to be selective,” says Thomas Cole, co-founder of Distillate Capital Partners. “Returns in small caps are made much better over the long term by simply avoiding money-losing businesses.” DSMC puts this small-cap quality philosophy in practice by employing a proprietary free cash flow yield screen.
“With DSMC, we are able to assemble a portfolio of 150 stocks that has a free cash flow-to-enterprise value yield of about 8.5%, over 5% better than the Russell 2000’s 3.2% or the S&P 500’s 3.3%,” Cole explains. Since the ETF’s inception on Oct. 5, 2022, DSMC has delivered a 12.3% annualized return, beating the 10% return of the Russell 2000. The ETF charges a 0.55% expense ratio.
Simplify Bond Bull ETF (RFIX)
The inflation shock of 2022 and the higher-for-longer rate environment that followed caused bonds to suffer historically steep losses and lag in recovery. Investors betting on a fixed-income comeback can overweight longer-duration bonds or use leveraged bond ETFs, but more sophisticated options like RFIX are now available. Despite being an alternative ETF, RFIX is reasonably priced, with a 0.5% expense ratio.
“RFIX provides a simple and more efficient way to obtain significant long-duration exposure,” says Jason England, managing director, portfolio manager and fixed-income strategist at Simplify. “We use seven-year over-the-counter, receiver ‘swaptions,’ which act like a long-term call option on the 10-year Treasury rate.” This ETF is tactically positioned to benefit from a potential fall in long-term interest rates.
Amplify Natural Resources Dividend Income ETF (NDIV)
“NDIV is primarily concentrated in energy and materials companies, which have been out of favor this year, but that’s exactly why it stands out as an attractive contrarian opportunity,” says Nate Miller, vice president of product development at Amplify ETFs. “It offers high-quality natural resource exposure with strong dividend income at attractive valuations at a time when valuations are stretched.”
This ETF tracks the EQM Natural Resources Dividend Income Index. It provides exposure to U.S.-listed energy, chemicals, agriculture, metals and mining, paper products, and timber companies, which also includes the American depositary receipts of foreign-domiciled stocks. The ETF is structured to deliver both inflation protection and high income, with a 7.3% 30-day SEC yield.
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