Three Index Bets for 2013

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Its fair to reconsider your portfolio at the beginning of every new year and think of what has changed in the world, which bets have performed well for you and which ones have gone against you. At the beginning of every year I try to think which trends might be in place during the next 12 months and, based on that, I try to see which assets could benefit from those trends. Here I suggest three bets based on ETFs representing market indexes that could help your portfolio outperform the market.

SPDR S&P 500 (NYSEMKT: SPY) is the ETF that tracks the S&P 500. You can think of it as a proxy for the US economy. If the economy does well, SPY´s price should also do well. The current forecast is positive: the IMF expects the US to grow by 2.1% in 2013 and a sustained decrease in the unemployment level (current unemployment is 7.7%). Even if expected growth is already in the current $146 price and 14x P/E multiple for the index (SPY went up by over 12% in 2012 and is up by over 2.5% this year), I am sure that US economic performance will surprise most analysts on the upside given the on going housing recovery. How should you play your long bet on the US economy? Don't buy the ETF, just sell puts with a reasonable strike price. At current prices, I would sell the December 2014 put at the $140 strike. If the S&P does not go below 1,400 points by December 2014 you would have made $15.5 per every contract. You would only lose money if the S&P goes below 1,245 points by December 2014. You would be playing the insurance business game selling risk at a premium. The one difference is that you would have the FED on your side inflating the economy (and the S&P).

iShares MSCI Brazil Index (NYSEMKT: EWZ) is the ETF representing the Brazilian market. Last year was not the best year for Brazil's economy and, hence, neither for EWZ. The ETF was down by more than 5% in 2012. Last year's growth has been lower than 1.5% but thanks to government led stimulus (the central bank lowered rates aggressively from 12.4% in 2011 to the historically low level of 7.14% nowadays) growth is expected to accelerate to 4% in 2013. Even more importantly, Brazil's story is still one of the most interesting stories among Emerging Markets. Its big internal market (over 200 million) and growing middle class assures continued long term growth. EWZ main assets are top quality companies from oil giant Petrobras to beverage champion AmBev. EWZ´s total annual operating expense is 0.59% and its 12 month Yield to NAV is 2.85% (EWZ currently trades at par with NAV). In this case I would just buy the stock and hold it!

Spain has to recover at some point but 2013 will not be an easy year. The IMF expects 2013 growth to be still negative at -1.3% and unemployment to remain at the stubbornly high level of 25%. That said, its current account deficit is ameliorating fast (current account balance is expected to be 0% in 2013) and the ECB has given clear signals that it intends to do “what it takes” to keep countries within the Euro area. As a result, bond yields have been lowered from the unsustainable 7% level to the still high though more sustainable 5% level. Even if the outlook doesn't seem great its good enough to justify a good price performance for Spanish assets in 2013. How should you play it? Buy the Spanish Market ETF iShares MSCI Spain Index (NYSEMKT: EWP). Even if its now trading at near its 52 week high, the index still has a lot of room for growth.

ETFs are great to express your general ideas about the world into actual bets on how things are about to develop. As I said at the beginning, I always like to place a few bets at the beginning of every year and see how those bets develop. The ETFs above will give you a fair exposure to the US recovery (through SPY), the Brazilian come back to growth (through EWZ) and to the cheap Spanish market (through EWP).  


Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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