In anticipation of the summer doldrums, many have increased cash positions to sit out potential volatility ahead. However, increasing negative sentiment may signal contrarian opportunities for some areas of the market and exchange traded funds.
A Bank of America Merrill Lynch fund manager survey revealed that money managers are increasing their cash positions this month and repositioning for a “summer of shocks,” reports Ben Eisen for the Wall Street Journal.
The average cash balance among fund managers increased to 5.5% in May from 5.4% in April. Meanwhile, U.S. equity exposure is underweight by 18%, compared with 10% in April, with a shift away from American stocks for more than a year.
Asset flows also reveal high demand for quality assets, which is now the most crowded trade this year.
Whenever average cash balances rise above 4.5%, Bank of America data showed that it generated a contrarian buy signal for equities. BofA analysts suggested that contrarian investors should be long risk assets in the United Kingdom and Japan, along with technology and industrial sectors.
Trending on ETF Trends
Investors can also gain exposure to these areas through diversified ETFs. For instance, a more optimistic outlook has helped the CurrencyShares British Pound Sterling Trust (FXB) and iShares MSCI United Kingdom ETF’s (EWU) rally on Wednesday. U.K. assets strengthened Wednesday after a Ipsos Mori survey revealed growing sentiment for the United Kingdom to remain with the European Union in the upcoming so-called Brexit vote.
The iShares MSCI Japan ETF (EWJ) has been languishing as the Bank of Japan disappointed investors by standing pat on its monetary policy. However, further accommodative measures could help revive the trade, especially currency-hedged ETFs like the WisdomTree Japan Hedged Equity Fund (DXJ) , iShares Currency Hedged MSCI Japan ETF (HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) .
The technology sector has fallen out of favor this year as investors turned away from growth names and previous high flying FANGs – Facebook (FB), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOG). Nevertheless, contrarians seeking broad exposure to the space have a number of options, including Technology Select Sector SPDR (XLK) , Vanguard Information Technology ETF (VGT) and iShares U.S. Technology ETF (IYW) .
Industrials may also do better during the late economic cycle. Broad sector options include Industrial Select Sector SPDR (XLI) , Vanguard Industrials ETF (VIS) and iShares U.S. Industrials ETF (IYJ) .
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