Five ETF Ideas For Contrarian Investors

by on February 9, 2010 | ETFs Mentioned:

Markets have been off to a rough start in 2010 with most major benchmarks falling more than 5% year-to-date and  sparking fresh fears over a double-dip recession. Relatively few asset classes have gone unscathed as equities, both domestic and international equities have dropped in tandem with commodities. While some see this as a long-overdue downward correction, others see a possible buying opportunity to scoop up quality funds at discount prices.

Warren Buffet once famously advised investors to”be fearful when others are greedy and greedy when others are fearful.” With waves of fear sweeping through global markets, those who have taken this mantra to heart are presented with several buying opportunities. Below, we highlight five funds that are down but not out–ETFs that have been battered throughout the first six weeks of 2010 but have potential to deliver strong returns for bargain hunters willing to take on some risks.

Global X China Materials ETF (CHIM)

YTD 2010 Performance: -17.0%

Why It’s Down: Global commodity prices have plummeted as fears over a debt crisis in Europe and scaled-back lending in China have ramped up. China’s biggest bank has said that it will curb lending in order to help prevent an asset bubble from forming in real estate, both industrial and residential. While perhaps good for the Chinese economy in the long-run, this news has pushed down the demand for industrial materials such as copper, which is a critical component in housing. CHIM’s holdings include producers and miners of steel, iron, copper and gold, many of which have seen prices and demand sapped by expectations of a stimulus unwinding.

Why It Might Not Be Out: China recently overtook Germany as the world’s top exporter, and the Chinese economy continues to expand at rates that far exceed the developed world. There are more specific reasons to be bullish on China’s materials sector. Just over 8% of China’s imports are ores and metals, suggesting that the domestic basic materials industry has plenty of room to grow. Also, despite the fact that China produces more coal than any other country by far, it does not even rank in the top 15 for coal consumption per capita. As the trend towards urbanization in China continues and the country’s middle class swells in size, demand for materials to build urban housing and infrastructure could surge.

Market Vectors Solar Energy ETF (KWT)

YTD 2010 Performance: -17.7%

Why It’s Down: A sharp decrease in commodity prices has made investment in solar less attractive, while continued economic turmoil has kept the climate change initiative on the back burner. With governments around the world struggling with record deficits, state subsidies for alternative energy industries has begun to wane. Germany, historically home to a booming solar energy industry, recently announced major reductions to solar energy subsidies and incentives, creating a more difficult path to long-term sustainability.

Why It Might Not Be Out: Germany may have set the stage for other developed markets to scale back their support of solar power, but China is eagerly positioning itself to become the new leader in green technology. Through various government programs, China is subsidizing the majority of construction and connection costs for both on-grid and off-grid solar power plants until 2011, and has established the lofty goal of increasing its solar capacity from 50 megawatts in 2008 to at least 10 gigawatts by 2020.

iShares MSCI Spain Index Fund (EWP)

YTD 2010 Performance: -14.0%

Why It’s Down: With Greece’s public finances in ruins, many investors have identified Spain as the next weakest link in the euro-zone chain, sending Spanish equities plunging. Spain’s unemployment rate of 18.8% is cause for concern, as are debts that have doubled over the past year. While much of the Euro zone has resumed marginal economic growth, Spain remains mired in a recession, and is expected to stay there through at least 2011. “We hear a lot about how Spanish banks were prevented from purchasing American toxic assets,” said Fernando Broner, an economist at the Barcelona-based Center for Research in International Economics. “But they’ve managed to create their own toxic assets.”

Why It Might Not Be Out: It appears that Greece’s EU neighbors are prepared to step in and guarantee the troubled nation’s debt, significantly reducing the likelihood of a debt crisis in the region. Furthermore, it appears as if Spain is taking proactive steps to prevent further deterioration of its fiscal situation; the government has announced that it will issue 34% less debt than in 2009, helping to ease market concerns.

Another item to note: EWP’s top two holdings, Banco Santander and Telefonica, account for more than 40% of the fund’s total assets. Both of these companies have seen significant growth in recent years, but it hasn’t come from Spain. Santander and Telefonica both maintain major operations in Brazil, making EWP perhaps more dependent on an improved outlook for South American stocks.

HOLDRS Broadband (BDH)

YTD 2010 Performance: -13.9%

Why It’s Down: The primary reason for this fund’s sharp decline is Qualcomm which makes up over half of the portfolio of BDH. Qualcomm slumped more than 10% in late January after noting that it sees a “subdued” economic recovery and a scaled back sales forecast, which helped to drag down the entire chip sector.

Why It Might Not Be Out: Qualcomm and other firms in BDH are poised to capitalize off of the growing smartphone market thanks to their superior wireless technology (for a more in depth analysis of Qualcomm and its strengths, see this article). After claiming the title of top performing sector in 2009, technology stocks have taken it on the chin to start the new year. But there are some reasons for hope. Of the 49 software developers, computer producers and Internet companies that reported earnings since January 11, 44 have beaten estimates. Data compiled by Bloomberg shows that tech stocks are currently trading at about 13 times estimated 2011 profits, half the median valuation since 1994.


YTD 2010 Performance: -11.2%

Why It’s Down: The tables have turned in recent weeks, as concerns about defaults in a relatively narrow slice of the European economy have weighed on equity markets here in the U.S. As fiscal issues in Greece and other European economies continue to worry investors, equity markets, including firms in the more fiscally secure countries of France and Germany, have been in a freefall.

Why It Might Not Be Out: Greece makes up such a small portion of the euro-zone that even if Greece collapses, the country’s more stable neighbors should be able to handle a bailout. In the meantime, a depressed euro could benefit economies that rely heavily on exports, such as Germany and the Netherlands. It now appears as if a bailout is underway, which could help to boost market sentiment and push European equities back up. Either way the short-term future could be bright for the euro-zone.

For more ETF ideas, make sure to sign up for our free ETF newsletter.

Disclosure: no positions at time of writing.