When Jeffrey Gundlach speaks, investors listen. I’ve been listening to the DoubleLine Capital CEO/CIO for years, as he’s one of the smartest men on Wall Street. And after correctly predicting both a Donald Trump presidential victory, and the subsequent post-election Trump equity rally, Gundlach is making a different call today … one that involves short selling the S&P 500 and buying emerging markets.
This “short home, long abroad” strategy was revealed this week by Gundlach at the Sohn Investment Conference in New York. The DoubleLine chief, also known as “The New Bond King,” recommends investors should short the S&P 500 Index via the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) while also buying the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM).
Here’s the rationale straight from Gundlach as written in MarketWatch:
“The valuation of emerging markets is half the valuation of the S&P 500 when you look at things like price to sales, price to book,” said Gundlach in an interview with CNBC after his Sohn presentation.
Gundlach said a strong dollar has underpinned weakness in emerging-market equities but said the dollar’s strength has tapered lately and may not strengthen significantly, even as the Federal Reserve embarks upon a path of monetary-policy tightening.
That means Gundlach doesn’t think much of the upside potential of the greenback, or the upside potential for stocks in the broadest measure of the domestic market (i.e., the S&P 500).
So, if you want to play follow the leader and buy what Gundlach recommends, but you don’t want to get into the business of short selling stocks or ETFs directly, how do you do it?
The answer is easy, and it involves just a few targeted ETFs.
Jeff Gundlach Plays: ProShares Short S&P500 (SH)
You can short the S&P 500 by borrowing SPY shares from your broker, hoping the ETF will go down in value and then replacing those borrowed shares at a lower price (and hence a profit).
Or you can just buy the ETF designed to deliver the direct inverse of SPY, the ProShares Short S&P500 (NYSEARCA:SH).
This fund is designed to deliver precisely the inverse of the daily price movement of the S&P 500. It does this via a mix of targeted derivatives, but that target is remarkably accurate when it comes to mimicking the inverse value of SPY.
More importantly, buying SH is as easy as a few brokerage account clicks … and much easier than directly shorting SPY.
The SH charges 0.89% in expenses, or $89 annually for every $10,000 invested.
Jeff Gundlach Plays: ProShares UltraShort S&P500 (SDS)
If you agree with Jeffrey Gundlach, but you feel even stronger about the potential for U.S. stocks to fall, then “go big” with leverage. Doing so means short selling the S&P 500 via the ProShares UltraShort S&P500 (NYSEARCA:SDS).
Like SH, SDS is designed to move the inverse of the S&P 500; however, it does so using 2X leverage. That means the fund is designed to move twice the inverse of the domestic equity benchmark. And like SH, SDS is remarkably accurate at tracking that daily price change.
Just note that over a very long period, SDS’ returns can “wiggle” because of daily rebalancings — thus, if the S&P 500 declines 5% over the course of a year, that doesn’t necessarily mean the SDS will be up 10%. It could return 5%, 15% … it all depends on how the S&P 500 got there.
Still, if Gundlach’s “short home, sell abroad” thesis proves prescient, SDS could supercharge your returns.
Jeff Gundlach Plays: Forget EEM – Go IEMG or VWO
While Mr. Gundlach recommends buying EEM for broad-based emerging market exposure, that’s not the only way to do it.
In fact, that’s not my preferred way.
I think investors are better served with one of two other emerging market ETFs: The Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) or the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG).
Using VWO gives you a little bit different emerging markets exposure than EEM. One major difference between the two is that Vanguard’s fund does not include exposure to South Korea. Instead, it concentrates on the EMs of China, Brazil, Taiwan and South Africa.
VWO also is the largest, most liquid emerging markets ETF.
As for IEMG, it basically has the same exposure as the bigger EEM, but at a lower cost (EEM expense ratio is 0.72% vs. IEMG expense ratio of 0.17%). iShares’ fund also offers exposure to China (mainly Hong Kong), Brazil, Taiwan and also India, and unlike VWO, it includes South Korea.
The South Korea inclusion might put off some investors in emerging markets, as that country’s markets are being impinged by political risk. However, that risk is not enough to put me off of IEMG, or even EEM.
Still, if you want to get long emerging markets, I think VWO offers investors the best path.
Now, if you are convinced … go get your Gundlach on.
As of this writing, Jim Woods was riding a double-digit percentage gain in VWO alongside his Successful ETF Investing subscribers.
