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ETF Specialist

A Value Strategy That Doubles Down When Stocks Get Cheaper

Market-cap-weighted indexes can work against a contrarian value strategy.

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Value investors get compensated for taking contrarian bets, particularly when it is agonizing to do so. Sam Zell, known as "the grave dancer" for his penchant for buying companies as they emerged from bankruptcy, sold his Equity Office Properties Trust near the peak of the real estate market in 2007. In the depths of the financial crisis, Warren Buffett took a large stake in Goldman Sachs, which was desperate for capital at the time.

It is very difficult to sell stable companies and buy unstable companies during periods of uncertainty. Index funds are supposed to take emotion out of the equation and remove our behavioral biases. But traditional value indexes don't do a great job of replicating the behavior of contrarian investors. As a result of its market-cap-weighting approach, the Russell 1000 Value Index actually increased its exposure to relatively stable companies such as  Exelon Corp (EXC),  Intel (INTC),  Bristol-Myers Squibb (BMY), and  CVS Health Corp (CVS) in the wake of the 2008 financial crisis. At the same time, it decreased exposure to the most beaten-down value stocks, such as  General Electric (GE) and  Citigroup (C)

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.