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Casinos, Coffee and Mexico for the First Quarter

NEW YORK (TheStreet) -- What a year! Going into 2013, no one expected the broader market averages to hit all-time highs. With stagnant wage growth, higher taxes and a still-fragile real estate market, how could have anyone have called the 30% returns we received last year? And yet here we are. 

With such astonishingly high returns, some investors may be looking to diversify their portfolios for the new year. Occasionally investor portfolios can become unevenly weighted when one position moves drastically to the upside. In this article I want to highlight three exchange traded funds to consider in the first quarter. Look to these funds to add some diversification to your portfolio and perhaps spice up returns.

Gaming the System

I have highlighted the gambling industry a few times in the past year. Betting with the house is never a bad option, as returns are fairly predictable. And the best vehicle for diverse exposure to the the gaming space is the Market Vectors Gaming ETF (BJK), which holds familiar names like Las Vegas Sands (LVS), Wynn Resorts  (WYNN) and MGM (MGM).

Fears of a Chinese slowdown made waves last year in the casino market. Gambling revenues seem inelastic in the region. But Macau, the world's new gaming market, has shown little signs of a slowdown. Along with Hong Kong, Macau is one of two special administrative regions of the People's Republic of China. These semi-autonomous regions have a unique relationship with mainland China, which remains responsible for defense and foreign affairs. Yet Macau maintains its own legal system, police force, monetary system, customs policy and immigration policy.

While one might imagine that Las Vegas Sands, Wynn, and MGM are dependent on Las Vegas gambling, instead the market is focused heavily on their position in Macau. Indeed, double-digit gaming growth in Asia has powered casino growth in recent years. A note by Wells Fargo gaming analyst Cameron McKnight recently estimated that growth next year in Macau gaming will be about 10%. That is down slightly, but strong nonetheless after years of substantial growth.

Moreover, the growth in mass-market gaming should continue to hold up well into the next few years. This is in part due to infrastructure. A bridge joining Hong Kong, Zhuhai and Macau is scheduled to open by 2016. In addition, expanded intercity rail links will shorten travel time from China's northern cities to the central gambling regions. Greater access to Macau for both Chinese citizens and tourists should push gaming growth.

Sipping on JO?

I think investors should hold commodities as a diversifier.  Yet, the future of precious metals is uncertain. Let's instead look at the iPath DJ-UBS Coffee Subindex Total Return Fund (JO), which tracks the underlying price of coffee. Over the last few years, the price of coffee has dropped significantly, as has the value of this fund. By design, JO is a senior, unsubordinated, unsecured debt security that delivers returns from an unleveraged investment in futures contracts and interest earned on cash collateral.

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JO $18.34 1.21%
BJK $32.43 0.75%
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