Greatly Overweighting Sectors Is Fraught With Risk

by: Roger Nusbaum

Roger Nusbaum submits: This comment from a reader:

My reading of Geoff Considine's papers suggests his focus is on choosing low Beta for lowering the risk in portolios. On one low risk portfolio he has 45% in natural resources ETFs, because natural resources have low Beta in the previous years! Anyone who has any trading experiences recently knows the risk (or beta) for natural resources has jumped up significantly. I personally would not consider putting 45% in natural resources as a low risk approach -- 10-15% will be my upper limits.

I did not realize the resource weighting was as much as 45%, I thought it was closer to 27% (for energy anyway) but I could be wrong.

Either number, along with any number in between, is a big percentage. The weight for energy these days in the S+P 500, as measured by the IVV ETF, is 10.34%. The materials sector, where most other natural resource companies come from, comprises 3.03% of the index.

The 27% that I recall is a doubling up versus the market. The 45% the reader cites is more than a tripling of the benchmark weight. Personally I don't care what any statistic says about this, whether that stat is forward looking or backward looking, there is no way I would put that much client money, or mine for that matter, into one area of the market.

Applying a 'kick the tires' analysis tells me this is fraught with risk. The reader's point about beta having gone up is a good one and if you are inclined to put that kind of thought into it, great. I think an easier way to think about this though is that there are ten sectors in the S+P 500. Putting 30%, let alone 45%, into any one theme is just too much.

I will repeat what I said before about the author: I don't doubt he is smarter than me and gets better results than me but I do not want to have so much of my portfolio riding on one outcome. That the data really could be backward looking makes the strategy even riskier.