A Howling Good Idea: Country Dogs In An ETF

The Dogs of the Dow strategy suggests investors buy the blue-chip index's 10 highest-yielding names at the start of a given year with the idea that the stocks can potentially top the broader market in the year ahead.

“Dogs” strategies are not confined to the Dow or U.S. stocks, as confirmed by the newly minted Arrow Dogs of the World ETF DOGS. DOGS tracks the ex-U.S. AI Dogs of the World Index.

The index selects the five worst-performing countries where a return reversal or move back toward the mean or average is anticipated. The index has a contrarian approach that looks for deep value among a universe of 44 countries,” according to Arrow Funds. 

A Contrarian Bet

The DOGS selection universe can include developed, emerging and frontier markets. The ETF is designed to focus on a concentrated number of countries. Last year's worst-performing country in the index garners a 30-percent weight in the benchmark, while four other countries command weights of 17.5 percent apiece.

In simple terms, DOGS can be viewed as a contrarian idea or a play on securities reverting to the mean, which data suggest is a powerful signal.

“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.”

It Works

The countries that would have been labeled dogs at the end of 2016 delivered stellar returns in 2017. For example, stocks in Argentina and Poland surged more than 56 percent last year, while Italian and Austrian dogs jumped more than 50 percent.

Last year, the average dogs country topped the widely followed iShares MSCI EAFE Index Fund EFA by nearly 400 basis points, according to Arrow data.

DOGS charges 0.65 percent per year, or $65 on a $10,000 investment.

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