Arrow Funds has adapted the so-called Dogs of the Dow investment approach to include global names with its new exchange traded fund strategy.
On Wednesday, Arrow Funds launched the Arrow Dogs of the World ETF (NYSEArca: DOGS), which has a 0.65% expense ratio.
The new DOGS is seen as a compliment to Arrow Funds other recent addition, the the Arrow DWA Country Rotation ETF (NasdaqGM: DWCR).
“DWCR and DOGS represent a sort of yin and yang approach to international equity exposure,” Joseph Barrato, Arrow Funds CEO and Director of Investment Strategy, said in a note. “On one hand, in DWCR we have a holistic international solution that provides exposure to top performing countries. On the other hand, with DOGS we offer an opportunistic play for value-minded investors by identifying the worst performing countries.
The Dogs of the World ETF is seen as a contrarian strategy in that it tries to find value among the worst performing international securities where a mean reversion is expected. DOGS’s underlying index is comprised of the five worst-performing countries among 44 developed, emerging and frontier markets. The strategy would typically buy into a country when price declines are expected to turn and sell when price rises in anticipation of a peak.
“We are pleased to introduce DOGS, the first packaged mean reversion strategy with an international focus, giving investors the opportunity to have exposure to an investment strategy that taps into deeply undervalued countries,” Barrato added.
The Dogs of the World ETF will try to exploit the mean reversion anomaly where price and returns eventually move back to the mean or average.
“The mean reversion anomaly is one of the oldest anomalies described by academia. It was originally discovered between stocks in one country, but subsequent academic studies have shown it also works on broad country market exposure, and its performance shows strong consistency. One fundamental reason to explain the mean reversion anomalies across countries is insufficient cross-border equity flows due to investors’ fears of capital controls. Another explanation is behavioral biases in investors’ behavior,” according to Arrow Funds.
In contrast, DWCR is comprised of developed and emerging country stocks exhibiting relatively strong momentum characteristics, so the country rotation strategy would buy when relative strength is established and sell after any signs of weakness.
For more information on new fund products, visit our new ETFs category.