The $1.7 billion SPDR S&P Homebuilders ETF, one of the largest funds that focus on the market, has gained approximately 6 percent over the last 12 months, according to Morningstar data. It closed down 2.2 percent on Friday, while the iShares U.S. Home Construction ETF ended down 2.3 percent and the PowerShares Dynamic Building & Construction ETF lost 1.6 percent.
Gundlach, whose $32 billion Total Return fund has returned an annualized 6.1 percent over each of the last three years, has been increasing his positions in long-duration U.S. Treasurys and dollar-denominated emerging market debt, he said.
"The U.S. has vastly better demographic prospects than the rest of the developed world," Gundlach said. That population growth will allow the economy to expand and bring in tax revenues to pay for entitlements and other government spending.
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While yields of long-duration Treasurys are still low by historical standards, they are much more attractive than any other segment of the overall bond market, Gundlach said. Corporate bonds and junk bonds "have never been more over-valued in history" thanks to the Federal Reserve's bond-buying stimulus program, which has sent interest rates to near zero and pushed investors into riskier assets for income, he said.
Junk bonds currently make up only approximately 3 percent of his diversified funds, and he has no assets in junk bonds in many of his private accounts, Gundlach said.
Gundlach is bullish on dollar-denominated emerging market debt, in part because these bonds, which often yield 8 percent or more, are attractive to corporate pension plans attempting to limit their risks after the stock market rally in 2013 put many on firmer footing.
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With growing populations and lower debt levels, emerging market countries have better fundamentals than the developed world, and their dollar-denominated bonds take away any currency risk, he said.
While he is bullish on emerging markets overall, Gundlach is wary about expectations that growth in China will reaccelerate. The country is facing demographic pressures from its one-child policy, leaving it "overdue" for a correction that will in turn contract its economy, Gundlach said.
Investors should wait to buy the Shanghai index until at least it breaks above the 2,400 level, he said. The index closed at 2,036.52 on Friday.