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 - Get Report), which holds familiar names like Las Vegas Sands (LVS - Get Report), Wynn Resorts (WYNN - Get Report) and MGM (MGM - Get Report).
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.
Over the last few weeks, the price of the fund has begun to stabilize and show some signs of life. Earlier this month, supply concerns squeezed futures slightly, due to declining exchange-certified inventories. Since bottoming around $21 per share, JO hovered around $22 a share for the last week.
Investors could position themselves long JO with a clear exit point below the most recent lows. Supply concerns, poor weather or a simple squeeze could create high returns. Technically, the chart has started to show some signs of consolidation.
I don't like calling bottoms, but I think that you could take JO long with a stop around the most recent lows, about $2.00 below the current trading price.
Emerging Market Woes
Emerging markets really weren't the place to be in 2013. Slower-than-anticipated growth and currency troubles have held back the returns of the many ETFs that follow the developing world. The iShares MSCI Emerging Markets Fund (EEM - Get Report) and the Vanguard FTSE Emerging Markets Fund (VWO - Get Report) have both dramatically underperformed domestic equity markets over the last year, with negative returns of 5% and 7%, respectively.
Some analysts are predicting a broad emerging markets rally in 2014. But I think investors should try to pick and choose their exposure to the space. Consider an investment in Mexico through the iShares MSCI Mexico Fund (EWW - Get Report).
J.P. Morgan recently noted that it expects strong economic growth acceleration for Mexico, to 3.4% in 2014, up from 1.4% in 2013.
After 2013 domestic reforms in Mexico, J.P. Morgan predicted enhanced cost competitiveness for the country's manufacturing economy and a broad sustainable growth outlook. Moreover, a continuation of the economic recovery in the U.S may spill over into Mexico. Manufacturing goods in Mexico offers many advantages to American producers, including faster shipping times, lower shipping costs and duty-free transportation across the border.
As the American relationship with China becomes more and more complicated, we could start to see our neighbor to the South pick up some manufacturing business.
Investing for 2014
Try diversifying in 2014 to take advantage of growth opportunities. The Macau gaming industry looks strong and stable. Infrastructure improvements within the region should allow greater access to casinos for more of the Chinese population. Commodity coffee sits at multiyear lows, despite rising demand for the hot stuff. Play coffee with some protection, considering using a stop loss to protect against a continuation to the downside. Lastly, check out Mexico for your emerging-markets exposure. Strong growth, economic improvement and a growing U.S. economy should aid an investment in the region.
At the time of publication the author was long on LVS and JO, but did not own any of the other securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.