U.S. Markets close in 2 hrs 18 mins

Advisors May be Under-Allocated to These ETFs


Investors are constantly hearing about remaining diversified and not putting all of their investment eggs into a single basket. However, data suggest some fund managers are woefully under-allocated to several previously popular sectors and themes that are easily accessed via ETFs.

Data from Bank of America Merrill Lynch indicate that fund managers are  currently lightest in commodities relative to historical norms, understandable given the increased volatility and downbeat price action this year for ETFs such as the SPDR Gold Shares (GLD) and Market Vectors Gold Miners ETF (GDX) . [Volatility Jumps for Gold, Mining ETFs]

Money managers are also underweight the consumer staples, telecom and utilities, indicating the investors surveyed by BofA Merrill Lynch may be looking to alternative sectors for yield and income.  Professional investors’ underweight of those sectors could also be a sign they expect Treasury yields to rise again.

Staples, telecom and utilities are among the most rate sensitive sectors. Interestingly, increased volume and price action in utilities ETFs earlier this week could have been a tell that investors are expecting another Treasury yield spike. [Are Utilities ETFs Saying Rates Will Rise Again?]

With four emerging markets equity ETFs among this year’s 10 worst in terms of ETFs outflows, it is not news that fund managers are under-allocated to developing economies. In the past three months, the two largest Brazil and China ETFs are up an average of almost 14% and the Vanguard FTSE Emerging Markets ETF (VWO) is up 7.1%.

Whether those performances are enough to get investors off the emerging markets sidelines remains to be seen.

While it is not shocking that fund managers are underweight commodities and utilities, it can be viewed as surprising that the fund managers surveyed by BofA Merrill Lynch are lightly allocated to pharmaceuticals stocks. The Health Care Select Sector SPDR (XLV), which is heavily though not fully allocated to pharma, is up 32.9% year-to-date. The SPDR S&P Pharmaceuticals ETF (XPH) has surged 41.3%.

Consumer discretionary tops the list of over-weighted sectors, something BofA Merrill Lynch recently warned about.

In a mid-August report, the bank outlined a bearish outlook on consumer discretionary stocks, saying it believed  the sector is “the most overweight sector relative to the S&P 500 by large cap active managers,” while noting downside earnings risk and consumer vulnerability to rising interest rates. [Discretionary ETFs Slipping]

Still, the Consumer Discretionary Select Sector SPDR (XLY) is up almost 6% since August 16.

Chart Courtesy of Bank of America Merrill Lynch via The Reformed Broker