Dow Jones Indexes has launched US Contrarian Opportunities Index that seeks to measure a 'contrarian' investment strategy by focusing on companies with strong recent fundamentals but a lagging three-year-trailing return.
The Dow Jones US Contrarian Opportunities Index has been licensed to Javelin Investment Management to underlie an exchange-traded fund (ETF), available at NYSE Euronext.
The universe for the Dow Jones US Contrarian Opportunities Index is the Dow Jones US Broad Stock Market Index, which measures the performance of the largest 2,500 US stocks by float-adjusted market capitalization. These stocks will be ranked in descending order by their three-year trailing total returns, and the 1,250 best-performing stocks will be removed. The remaining stocks will then be ranked in descending order by float-adjusted market capitalization, and the lowest 5% of stocks will be removed.
Meanwhile, the remaining companies join the current index components to form the selection pool and will be further ranked by 10 qualitative financial criteria: long-term expected profit growth; enterprise value to EBITDA; earnings-per-share revisions for the current fiscal quarter; earnings-per-share revisions for the next quarter; price/cash flow ratio to five-year median; cash-flow change in the previous quarter; price/earnings ratio; price/free cash flow ratio; total return for the past six months; and five-year sales growth.
For each of the 10 factors, companies will be scored based on their ranking; these scores will be then summed in a final composite rank. Any existing component company whose composite rank falls from 1-175 will remain in the index, and non-component companies are selected based on composite rank until there are 125 stocks. Sector weighting is capped at 30% of the index.
The Dow Jones US Contrarian Opportunities Index is equal weighted and reviewed semi-annually in January and July with changes taking effect in February and August respectively. The index is calculated in US dollars and both price and total return versions are available.
Michael Petronella, president designate at Dow Jones Indexes, said: “The Dow Jones US Contrarian Opportunity Index allows market participants for the first time to track a contrarian investment strategy with a rules-based tool. The Dow Jones US Contrarian Opportunities Index is designed to systematically measure the performance of stocks that lag the broader market in terms of recent performance, but that outrank their peers based on fundamentals-based and other qualitative criteria.”