Published January 22, 2013
Last weekend, Barron's unveiled its 2013 roundtable issue. The panel includes such financial luminaries as Mario Gabelli, Bill Gross and Swiss hedge fund manager Felix Zulauf.
Investors will find Zulauf's roundtable picks interesting because plenty of those picks include some highly popular exchange traded funds, indicating that Zulauf is among the hedge scions embracing ETFs these days.
Without further ado, here are some of the ETFs investors can use to mirror Zulauf's ideas for 2013.
iShares MSCI France Index Fund (EWQ) The iShares MSCI France Index Fund makes the list for all the wrong reasons. That is to say Zulauf is bearish in his assessment of the Eurozone's second-largest economy. In the Barron's roundtable, Zulauf notes the French economy "has become noncompetitive" and "it is beginning to unravel." Notably, the hedge fund manager told Barron's the French government "is marching in the wrong direction, toward more socialism."
To EWQ's credit, the ETF has fought off the loss of France's AAA credit rating to reside within earshot of its 52-week high. On the other hand, it must be noted that plenty of other traders seems to share Zulauf's bearish view of France. Forty percent of EWQ's shares are sold short leading to a short ratio of almost 11.7, according to Finviz data.
WisdomTree Japan Hedged Equity Fund (DXJ) Zulauf is not exactly bullish on Japan, but he does believe the U.S. dollar will continue to gain strength against the yen. He previously recommended being long USD/JPY at 79. The pair now resides around 89 and Zulauf forecast that exchange rate going to 120 in two years.
On a related note, Zulauf said he "would be surprised if the Japanese stock market didn't rally 50% in the next two years." His preferred instrument for playing that upside is the suddenly popular WisdomTree Japan Hedged Equity Fund (DXJ). Not only does DXJ filter out companies that depend on Japan's domestic market for the bulk of their revenue, the ETF also hedges exposure to USD/JPY fluctuations.
That utility (and a stellar performance) help explain why DXJ has seen its assets under management total grow to over $2 billion from $516 million in early December.
Zulauf's outlook on EWZ centers around Brazil being a major commodities producer and commodities getting a lift from a weaker U.S. dollar. However, he did acknowledge that Brazil's government is heading down a troublesome path of its own, prompting him to call Brazil "only a trade, and not an investment." EWZ has gained over three percent in the past month.
Although EWZ has shown some signs of shedding its laggard status gained in 2012, investors may want to consider Brazil ETFs that focus more on the country's domestic economy over its export story. EWZ has outperformed the Market Vectors Brazil Small-Cap ETF (BRF) and the Global X Brazil Consumer ETF (BRAQ) over the past month, but over the past year, BRF and BRAQ have dominated EWZ.
iShares FTSE China 25 Index Fund (FXI) Zulauf deserves some credit on this one. He recommended FXI, the largest China ETF by assets, in October 2012 when the fund was trading in the $34-$35 area. FXI is flirting with $42 on Tuesday. He told Barron's: "China's market has been disappointing and could probably rally a little longer. The Chinese market is trading where it did in 2001."
No one is apt to complain about FXI's 10.7 percent gain over the past 90 days. However, if history repeats itself, FXI could once again lag other marquee China ETFs over longer time frames such as the SPDR S&P China ETF (GXC) and the iShares MSCI China Index Fund (MCHI).
Direxion Daily Russia Bear 3X Shares (RUSS) Zulauf clearly likes some emerging markets, but that affinity does not extend to Brazil. In fact, he had some rather harsh words regarding the "R" in BRIC at the Barron's roundtable. "Nor do I trust Russia as a country. Putin [Russian President Vladimir Putin] blew it. He had the chance to democratize Russia and create free-market structures. Instead he went the other way and helped the oligarchs. This is bad for Russia, and the country's demographics are awful," Zulauf told Barron's.
Lack of transparency, trust and free-market principles are the typical catalysts that have kept investors out of Russia so Zulauf is correct in his assessment of the country. The biggest risk to his thesis being incorrect is that oil demand surges amid a strong global economic recovery this year. That is not expected to happen as many energy analysts expect global oil supply to outstrip demand in 2013.
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