Why I'm investing in a Losing Stock

Going against the grain is difficult. Especially, when market gurus make public statements that caution individual investors not to do what I’m up to. Still, it is happening.

The lonely exchange-traded fund (ETF) I am going to buy has a miserable track record. While the S&P 500 charged upward 40% in the last 5 years, according to the chart below from Yahoo.com, this underdog dropped 20%. It is the IPath Dow Jones-UBS commodity Index Total Return ETF, known as DJP.

That is an impressive lack of performance compared to the general market. It wouldn’t make many mothers happy.

While the S&P in green surged after our recent financial fiasco, DJP in blue dropped 20%. Chart courtesy Yahoo.com.

DJP “is designed to provide investors with exposure to the Dow Jones-UBS Commodity Index Total Return,” according to its marketing. It is unleveraged and invests in “futures contracts on physical communities.”

The top 5 holdings include gold, natural gas, crude oil, corn, and copper. Its expense ratio is 0.75%—high in my mind. But, it does provide rolling index rebalancing annually even though it is a passive index.

Now, this is why DJP may turn around.

First, there is always reversion to the mean. This is what I’m counting on. Also, while other ETFs, mutual funds, and stocks have increased in value, DJP hasn’t. In fact, it has dropped compared to them. Additionally, for those who are dividend shy due to taxes that must be paid in a taxable account, this ETF has no dividend at all. And, lastly, the 200-day moving average is positive. DJP bounced above it early this year and had continued in this manner.

If DJP had a mother, this surely would make her joyous.

DJP moved above its 200-day average early this year and has continued above it. Chart courtesy Yahoo.com.

For the record, I am not a fan of technical analysis, which is what the 200-day moving average represents. My primary motivation in my decision is that the ETF will see a reversion to its mean sooner or later. Plus, there are few options to buy what could be a winner at a modest price. So, for those with money, this might be considered for a small part of a total portfolio.

Besides it is nice to back a loser—especially if it wins.

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