U.S. markets have had an extraordinary run this year, with both the Dow Jones Industrial Average (DJI) and the S&P 500 Index (GSPC) up more than 15%.

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Barry Ritholtz, CEO of online quantitative research firm Fusion IQ and author of the widely read “The Big Picture" blog, recently trimmed back his clients’ exposure to U.S. equities and used the gains to buy positions in unloved markets: Europe and emerging economies. Ritholtz explains the surprising move in an interview with The Daily Ticker:

“Emerging markets are the cheapest markets that are out there and they’ve gotten absolutely shellacked,” he says. “We love when markets get shellacked because it makes things attractive for long-term purchases.”

Ritholtz defines long term as five to seven years. He chose two index funds that are designed to limit exposure to risky sectors and countries: Vanguard FTS Europe ETF (VGK) and the iShares Emerging Markets Dividend ETF (DVYE). Most investors prefer the iShares MSCI Emerging Markets ETF (EEM) for access to overseas markets but Ritholtz cautions against that strategy.

“EEM is very heavily weighted toward the BRIC countries (Brazil, China, Russia, India) and only has 35 holdings,” he says. “VGK has almost 1,000 holdings so no one part of Europe or one company can blow up. DVYE has almost 100 holdings so it’s not overly concentrated in one area.”

Ritholtz concedes that his shift away from U.S. stocks to beaten down markets may cause some investors to scratch their heads. But he insists the numbers are on his side.

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“Rather than focus on the headlines, which tell us only what has already happened, we are much more interested in valuations,” he wrote in a letter to clients. “Valuation trumps macro-tourism every time. Our asset allocation models are currently maintaining their weightings to Emerging Market equities, despite their recent unpopularity, and we are actively investing in Europe. We know this will require patience on our part, but we believe it will pay off over the long term. We feel that behavior, not a focus on the news of the day, is what separates good investors from the rest of the pack over time.”

The Eurozone officially emerged from an 18-month recession when it reported growth of 0.3% in the second quarter. Germany and France led the way, expanding at an annualized rate of 0.7% and 0.5% respectively. China and Brazil, two of the fastest growing markets in the past few years, are recording slower growth this year. Economists expect Brazil to grow 2.3% in 2013 compared to 7.6% two years ago. China’s growth has dropped by half since 2007, from 14.2% to its current growth rate of 7.5%.