Diamonds in the Rough

08/21/2013 10:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

Despite a challenging past year for the emerging markets, ETF expert Dave Fabian of Fabian Capital Management sees upside opportunities in Mexico and China.

Steve Halpern: We're here today with Dave Fabian of Fabian Capital Management. How are you doing, Dave?

Dave Fabian: Excellent Steve. Thanks so much for having me.

Steve Halpern: For those not familiar with your family history, the Fabian name is pretty famous in the advisory world. Your grandfather, Dick Fabian, was the pioneer of the telephone switch strategy, which was the first major trading system designed for fund investors, and your father, Doug Fabian, publishes several of the most popular and widely-read fund newsletters. Now you're continuing the family's tradition. Can you tell us a little about your background and your goals with Fabian Capital.

Dave Fabian: Absolutely! I started out in the investment field, actually working for my father for his investment newsletter, about eight years ago now, and him and I worked very closely together, both on the newsletter, following the trends of the market.

As you mentioned, my grandfather developed a system based upon the 39-week moving average, which today, most people consider the 200-day moving average to be a very similar equivalent to that, and so the basis of the philosophy was that when you're above the trend in the market, you're in stocks.

When you're below the trend of the market, you're out of stocks, and so my father has been publishing a newsletter for the last 30-plus years designed around that strategy. I worked with him for a long period of time there, and also started an asset management company with him.

I've been professionally advising clients and managing money for about, the last seven or eight years here now, and just recently broke away and started my own firm with my brother, Michael.

Really, it was designed around the opportunity to have more direct control over some of the portfolio management decisions, really getting back to strictly following the trends of the market and taking technical analysis to the next level, and so we started Fabian Capital Management here in 2013, and really took off to a lot of great success with everything that's happening in the market, it's been quite a ride, so far, this year.

At Fabian Capital Management, we have two primary objectives. Number one, of course, is risk management. That's our number one objective. We don't want to see our clients impart any large losses, and that, of course, comes back to the trend following system and the like.

Then, number two, of course, is capital appreciation. When the market is trending higher, we want to be in and seeing our accounts grow in value. Those are really the two core tenets that our firm is based off of.

Steve Halpern: Great! I recently read on your blog that you were looking at Asian and Emerging market stocks, and you note that they've had a very tough year, but you still see some opportunity there, in fact, you said some of the ETFs are diamonds in the rough. What markets are you looking at, that you see opportunities?

Dave Fabian: Emerging markets, as you mentioned, have had a very rough 2013 with the S&P 500 sitting on gains of anywhere from 15% to 17%. Emerging market stocks are still down this year, so there's been quite a big diversion from domestic markets, but there have been a few diamonds in the rough.

And the two markets that I've really identified are Mexico and China Small-Cap ETFs, and so those are the two emerging economies that have sort of busted the trend, in the context of the larger emerging market space, and appear to be doing a little bit better this year.

Steve Halpern: In the Mexico market, you've highlighted the iShares MSCI Mexico Capped ETF. Could you tell us a little about the fund and why you've picked that as a way to invest in Mexico.

Dave Fabian: Absolutely! The ticker symbol of the fund is (EWW). Currently has about $2.4 billion invested in just 49 stocks to trade in Mexico. The top three sectors of EWW are consumer staples, telecommunications, and materials, and those three sectors make up about 60% of the fund's assets.

One of the reasons I really liked this ETF is because, not only has it had a very nice recovery since the June lows that we saw in the market, but the sectors that it's primarily invested in are very defensive sectors, so they tend to perform better over time.

They have very nice dividend payouts, and so not only are we seeing strong price appreciation in Mexico, but I just believe that ETF specifically, is well-positioned in sectors that are going to perform better over time, than some of the more volatile sectors like energy and the like.

I think that Mexico can be a potential opportunity for the portfolio over other Latin American ETFs, like Brazil, which have had a much harder time this year. Mexico could potentially be, as you mentioned, a diamond in the rough.

Steve Halpern: You also recently commented favorably on the Guggenheim China Small-Cap ETF. Can you tell us a little about this fund, and particularly, why you prefer the small-cap plays in China, rather than the larger-cap stocks.

Dave Fabian: China has actually, you know, this is probably my favorite pick out of the two. The Guggenheim China Small-Cap ETF ticker symbol (HAO) is comprised of about 250 small-cap stocks, mostly centered in China and Hong Kong.

It's only got about $200 million in assets in the fund, but it's just had a very nice year, when compared to looking at, as you mentioned, large-cap stocks. Most people, when they think of China, especially in the ETF space, they think of ticker symbol (FXI), which is the large-cap iShares China ETF.

But one of the reasons that I like the small-cap sector better than large-cap is because the small-cap sector is more prepared to take advantage of local consumers there in China versus the larger-cap companies that are more focused on foreign exports.

In addition, with FXI, a lot of these huge companies in China are state run enterprises, and so I like to try to stay away from ETFs where you could get a lot of government intervention and things like that in some of the underlying stocks. HAO has actually performed much better than FXI from a price standpoint.

Right now, it's above its 200-day moving average. It hasn't had as good of a year as US stocks have, but ultimately, I think it's going to be a better long-term play for your portfolio in the Chinese sector, so consider ticker symbol HAO for your portfolio if you're considering an allocation to China at this time.

Steve Halpern: Well, congratulations to both you and your brother for launching the Fabian Capital Management group. We really appreciate you being with us today.

Dave Fabian: Absolutely! Thanks so much Steve!

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