The Top 2 ETF's to Buy in 2013

As a contrarian investor, I'm always looking to buy what people are selling and sell what they're buying. It's the only way to ensure you're getting a reasonable price. This often leads me to forsaken corners of the investment world. I recommended a Greek stock earlier this year, for example.

For most people, ETF's (exchange traded funds) are the best way to invest. Their low cost, transparency, diversification, tax efficiency and liquidity make them superior to individual stocks or traditional mutual funds. This prescription comes with some black box warnings: always avoid leveraged ETF's. Also steer clear of exchange traded "notes" (ETN's) -- which depend on the solvency of the issuer or sponsor. It's crucial to read the prospectus carefully. Finally, it's important to buy an ETF and hold it for the long-term, selling only when its price eclipses its intrinsic value. An ETF in the hands of a trader is as dangerous as any other gambling chip.

The intrinsic value of ETF's can be estimated by looking through to the individual holdings -- or by using the valuations of quality, third-party objective research services such as Morningstar.

Based on valuation, these are the top two ETF's I recommend for investors in 2013:

VGK -- Vanguard MSCI Europe ETF

Abject fear of Europe's debt problems continues to depress prices, leading to the best bargains on Euro stocks in decades. Top holdings include Nestle, HSBC and Novartis. There is substantial risk in this 445 stock portfolio, with 18 percent of the fund in financial services. But the 6 percent yield, average p/e ratio of 12, and meager 31 percent premium to book value compensate you for the risk (for perspective, the already cheap S&P 500 trades at a 97 percent premium to book). At these valuations, the underlying stocks have already priced in some form of Armageddon. With this ETF's modest 14 basis point expense ratio, access to Europe doesn't come cheaper than this. To replicate this portfolio on your own, the commissions and bid-ask spreads on these foreign stocks alone would be prohibitive.

DXJ -- WisdomTree Japan Hedged Equity

Japanese stocks have been a tiring story of gloomy stagnation and decline, with intermittent rays of progress. The staggering secular bear market that started in 1989 still persists, providing the harshest cautionary tale to any investor. International buyers have largely given up on Japan. As a result, however, stocks in Japan are now among the cheapest the world has ever seen. The average stock in this 271-company portfolio trades at no more than book value. Even the 1.76 percentyield is high by Japanese standards -- and no longer looks paltry in a low-interest-rate world. Top holdings include Mitsubishi, Canon and Takeda Pharmaceutical. This ETF is the only major Japanese ETF that hedges its dollar-yen exposure, meaning that a US-based investor is somewhat protected from a decline in the yen. I don't normally like currency-hedged funds because the hedging is often imperfect -- and a cost to the portfolio. And typically the foreign currency is undervalued along with the stocks. But this is an unusual circumstance: I believe the yen is substantially overvalued in contrast to the underlying equities. New leadership in Japan under Shinzō Abe's government is talking tough about reflation, a dynamic that favors stocks and disadvantages the yen.

For the long-term investor willing to buy what others have sold in droves, the VGK and the DXJ are my two top contrarian recommendations for the New Year.

The author may own the above-mentioned securities, both in client accounts and in his personal accounts. This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial adviser for specific information on how certain laws apply to you and about your individual financial situation. All investment involves risk of loss. No one should invest in any financial security without reading the full prospectus and seeking professional, personalized advice, if required.