Betting on Global Small Caps

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The good news about the global economy was bad news for two of your defensive positions in your Global Bull Market Alert portfolio. You were stopped out of the CurrencyShares Japanese Yen Trust (FXY) at a loss on a remarkably sharp move down in the yen on Friday. Improved economic data from the United States also weakened your position in the Rydex Weakening Dollar 2x Strategy H (RYWBX). I am recommending that you sell your position for a gain of 2.6%.

As your strong gains in iShares MSCI BRIC Index ETF (BKF), up 45.22%, iShares MSCI Chile Investable Market Index (ECH), up 31.8%, and iShares MSCI Hong Kong Index (EWH), up 19.8%, confirm, emerging markets are the place to be when global stock markets recover.

In fact, a bet on emerging markets was my investment pick for 2009. But this week’s Global Bull Market Alert pick does one better by combining two highly profitable asset classes, small caps and emerging markets, through the SPDR S&P Emerging Markets Small Cap ETF (EWX).

First, EWX offers you access to small caps in emerging markets that otherwise would be off limits. While some of the larger emerging market stocks trade in the United States, these smaller players never will.

Second, it’s well known that U.S. small caps tend to outperform large caps over the long run. Their small size makes them nimble and quicker to react to changing market conditions. Small caps in emerging markets are no different. This year, emerging market small-cap ETFs like EWX are outperforming their large cap counterparts by a comfortable margin.

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EWX Chart

Finally, EWX is well-diversified. Consumer goods make up 18.7%; materials, 18.2%; energy, 2.7%; utilities, 3.6%; health care, 2.8%; consumer services, 8.0%; business services, 6.1%; financial, 21.1%; software, 1.8%; hardware, 10.6%; media, 2.3%; and telecom, 4.1%. In terms of countries, Taiwan has a 30.5% weighting, followed by China (10.9%), South Africa (10.2%) and Brazil (8.8%). But you also get exposure to companies as far afield as Poland, Turkey, Israel, Morocco and Indonesia. 

So buy the S&P Emerging Markets Small Cap (EWX) at market and place your stop at $35.00. Here’s a word of warning. Small-cap emerging market companies are riskier, (and hence more volatile) than traditional (already quite volatile) emerging market investments. So you may want to adjust the size of your position accordingly.

Full disclosure: this is a position that I may purchase in the future for my own clients at my investment firm Global Guru Capital. (Please note that Global Guru Capital is not related to Eagle Publishing or any of its investment publications or trading services.)

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) rose slightly over the week, breaking the $40 level for the first time, before pulling back. I am moving this pick back to a BUY.

The WisdomTree Dreyfus Emerging Currency ETF (CEW) ended the week exactly where it started. With the U.S. dollar oversold, I am moving this defensive pick to a HOLD.

The iShares MSCI Chile Investable Market Index (ECH) rose 1.2% this week as Chile resumes its upward trend. Your position remains a HOLD.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) rose slightly as your bet on the Holy Land marches forward. EIS remains a BUY.

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The iShares MSCI Hong Kong Index (EWH) was flat this week. With Asian markets leading the global recovery, Hong Kong is a BUY.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) ended the week 5.37% higher, breaking through the $39 level for the first time in 2009. Like the energizer bunny, “Dr. Copper” just keeps going and going. This position remains a BUY.

PowerShares Financial Preferred (PGF) rose 1.5% during its first week in the portfolio. This high-yielding bet on the recovery in U.S. financial stocks is a BUY.

Claymore/AlphaShares China Real Estate ETF (TAO) hit a record high of $19.63 last Monday before selling off sharply late in the week. There are rumors that there is a single big seller in the market. When this is completed, this position should rebound strongly. That said, better to be safe than sorry. I am moving TAO temporarily to a HOLD.

P.S. For the first time ever, I’ve scheduled a special private meeting for my subscribers of Global Stock Investor and Global Bull Market Alert on Friday, Aug. 21, at this year’s MoneyShow in San Francisco. Think of this as a quick boot camp where I’ll reveal special techniques and "tricks of the trade" that I use in the markets. This is the kind of hands on training that I can only offer you in person. I’ll discuss my secret technique for choosing customized exit prices, an easy-to-implement formula on how much to buy of each pick to maximize your returns, and why I think the biggest returns for 2009 are still to come. I also will make myself available to answer any specific questions that you may have about any of my current recommendations. Please join me at the San Francisco Money Show, Pacific room C (4th floor), on Friday, Aug. 21, from 1:30 p.m. – 2:30 p.m. by registering here.

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