Market Strategists: 5 Contrarian ETF Investing Ideas

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Legendary stock market investor Warren Buffett famously said: "Be fearful when others are greedy and greedy when others are fearful." Here are five ETF investing 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 500 ( SH ).

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 vice versa.


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 stock positions.

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 ETF ( VWO ).

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 ( GDX ).

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 comparisons.

Gold and GDX stand to do well in the coming years based on the following:

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 forces.

4. Chad Karnes, chief market strategist at ETFguide.com in San Diego, Calif.:ProShares Short Real Estate ( REK ).

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 year.

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 iShares U.S. Home Construction's ( ITB ) 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 trouble.

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 Contrarian Profits 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.

Follow Trang Ho on Twitter @IBD_THO .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: GDX , ITB , REK , SH , VWO

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