investor Warren Buffett famously said: "Be fearful when others
are greedy and greedy when others are fearful." Here are five ETF
strategists who follow this mantra and the beaten-down ETFs
they're recommending as contrarian buys.
1. Mike Shell, president and chief investment officer at Shell
Capital Management www.shell-capital.com in Knoxville, Tenn.,
with $75 million assets under management: ProShares Short S&P
SH, -16% year to date, is the inverse ETF of the S&P 500
stock index, designed to rise when the stock market falls and
I believe the U.S. stock market is in the late stage of the
upward trend that began in March 2009. Since 1932, the average
bull market uptrend has lasted 36 months and the current trend is
54 months old. If history is a guide, this bull market is coming
close to an end.
I am seeing some early-stage evidence of the topping process.
For example, fewer stocks are rising and participating in the
uptrend. As the broad stock indexes like the S&P 500 have
been rising, fewer stocks are rising with it. At the end of bull
markets, investors become more and more selective so fewer stocks
participate in the uptrend. In addition, expected volatility is
at low levels. Toward the end of bull markets, investors become
complacent and their expectation for volatility is low.
One catalyst that could get the blame for a market drop is the
Federal Reserve tapering its quantitative easing, or bond
purchasing, program. When it stops buying bonds, bond prices will
decline and interest rates will rise. Rising interest rates are
typically negative for stocks.
Additional catalysts include tensions around the globe, like
Syria, the upcoming appointment of a new Fed chairperson and a
debt-ceiling deadline in mid-October. Therefore, a short position
in U.S. stocks has a high probability of success in the months
ahead. It can be used for speculation or as a hedge against other
The risk is the stock market may continue to rise and the ETF
will lose value. Placing stop-loss 8% below your buy price can
limit the risk. In addition, SH seeks daily investment results,
before fees and expenses, that correspond to the inverse of the
daily performance of the S&P 500. It may not perfectly track
the opposite of the price change of the S&P 500.
2. Matt Reiner, portfolio manager at Wela Strategies in
Atlanta, Ga., with $65 million AUM:Vanguard FTSE Emerging Markets
Currently the market has gone over 450 days without a 10% or
more correction and thus the market seems due for a bit of a
breather. But as we head into the end of the year, we continue to
believe that the markets will end the year on a high note.
One of the main catalysts for a successful return in VWO, -11%
year to date, will be if investors get the urge to take more risk
in the fourth quarter. Emerging markets were hit hard on the news
of possible tapering by the Federal Reserve because a lot of the
monies being pumped into the system were flowing there. Thus
investors became scared that emerging economies would be
drastically hurt because of the tapering.
Since the tapering shock has waned, emerging markets have
stabilized. VWO is down greater than 10% for the year, and the
contrarian investor may find some value in this beaten-up
investment. Emerging markets investments contain higher risks
than investments in the developed world, given their unstable
economies. If greater global risks emerge in the fourth quarter,
VWO will likely face some more pressures.
3. Jeff Vollmer, managing partner at Hyde Park Wealth
Management with $85 million AUM:Market Vectors Gold Miners (
In 2008, the price of gold bottomed and began a three-year
recovery, rising 161%. During that period, the gold mining
companies, which are leveraged to the underlying metal's price,
appreciated by more than 250% in nine months.
Rising prices will force a portion of the investment community
currently short gold to cover their positions. The resultant
buying would serve as another catalyst for gold and gold miners,
down 40% year to date.
Many gold miners are extremely cheap on a valuation basis. If
you schedule out the net present value of their future cash
flows, discounted by today's low interest rates, the price
response to the expected cash flows at current gold prices is
attractive, particularly on a historical basis. Gold mining
companies are priced below what their market prices have been
over the last few decades, particularly in their 20-year
Gold and GDX stand to do well in the coming years based on the
1) While global gold supplies remain tight, demand for gold
has increased dramatically in five of the world's 10 most
populous nations due to rising wealth levels and their cultural
affinities for the precious metal.
2) Personal income growth in emerging markets, underserved by
alternative savings and investment companies, has made gold an
increasingly popular asset to invest in.
3) Gold tends to do well when inflation rises and the dollar
weakens. Based upon the recent orchestrated easing efforts of
central banks around the world, we will probably see both in the
near- to mid-term.
4) As gold prices increase, so does the profitability of gold
miners, whose margins appreciate markedly as the same expenses
are put towards extracting a much more profitable commodity.
Remember, gold mining companies can be volatile, fluctuating
with the price of the underlying metal, as well as other market
4. Chad Karnes, chief market strategist at ETFguide.com in San
Diego, Calif.:ProShares Short Real Estate (
REK, -2% year to date, capitalizes on a decline in the housing
market. If all is well with the housing market, then why are
homebuilder stocks approaching bear market territory?
In March 2013 something happened to the housing industry, but
almost nobody noticed. Lumber prices peaked that month at over
$400 per contract. Since then lumber prices have been in near
free fall, falling over 25% to below $300 through summer. At
around $320 today, lumber prices are down significantly from
their peak prices, and worries us about the housing market.
Lumber has its ups and downs just like any market, but
generally it is considered a leading indicator to the housing
market since it's a key input. There also is empirical evidence
that supports lumber's importance to the housing market, as
significant declines in lumber prices have preceded all the major
declines in housing-related equities since 2005.
The housing market has also recently started to show some
fundamental signs of a slowdown as well. Along with the recent
25% rise in long-term interest rates, single-family home starts
have been declining since February. Weekly mortgage applications
have been declining since June. Home prices are now decreasing
month-over-month, not increasing as they were earlier this
Homebuilder stocks have also been showing significant relative
weakness to the rest of the equity markets. The 25% decline in
lumber prices this year helped warn of
Home Construction's (
) decline of over 25% and theSPDR S&P Homebuilders's (XHB)
fall of 15% since May.
Many REITs and homebuilder stocks are also now approaching the
20% bear market territory as well. Compare these declines in the
housing sector to a broader stock market that is only down a few
percent from its peak, and the housing industry seems to be in
The best days are behind the housing sector and equities
related to the sector could have another big move down as the
fundamental data continue to play catch up to what the lumber and
equity markets already know.
5. Brett Owens, editor of
in Baltimore, Md.:Market Vectors Russia ETF (RSX).
Investing numbers guru Mebane Faber ran the math on returns
from buying countries after they get clobbered. He found you'd
have averaged triple-digit returns if you'd bought countries
after their markets shed 60% or more.
While China and Brazil have been clobbered, Russian stocks,
-9% year to date, are behaving better than their BRIC
counterparts, trading north of recent 2012 lows.
You may be thinking, "isn't Russia run by a KGB thug? One who
allegedly steals Super Bowl rings?" One of the great contrarian
investors of all time, the legendary Jim Rogers, has gone on
record recently with a bullish view on Russia -- his first ever:
"Everybody hates Russia for many good reasons, including me for a
long time," Rogers told Stansberry Radio last month. "But
(President Vladimir) Putin's got a different view now, a
different attitude toward capital."
Another great thing about contrarian picks -- they're often
dirt-cheap. Russian stocks are trading for under six times
earnings -- less than half the valuation of the U.S. market.
Today, Western investors think emerging markets are
"yesterday's news," and they also believe it's the same old story
in Moscow. That means there are significant profits available to
those of us willing to consider the possibility of alternate
outcomes. Much like the famed "Dogs of the Dow" technique that
achieved superior returns by investing in out-of-favor stocks,
our "Dogs of the Globe" strategy is poised for double-digit or
even triple-digit returns.
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