El-Erian: Here's the big problem for investors

Europe vs. US; El-Erian eyes Treasurys

As many signs point to a Federal Reserve rate increase later this year, Mohamed El-Erian said there is now a major problem facing investors.

El-Erian, chief economic advisor at Allianz, told CNBC's "Fast Money: Halftime Report" on Monday that "the main issue facing a lot of investors today" is whether to chase the momentum created by new quantitative easing in Europe, or to adopt a more relative portfolio approach. He advised the latter.

"Focus on specific stories on the equity market, this is not the time for the general beta trade, this is the time for very specific stories," he said while explaining that Europe's current round of QE is unlike the Fed's actions that pumped up U.S. markets.

Mohamed El-Erian
Scott Mlyn | CNBC

"We should respect the QE trade," he said. "I don't think it's the QE trade of the old type—which is the generalized compression in all the risk spread and risk premium, that's gone, so I don't think it's a beta trade—I think it's much more a relative trade."

The star economist also reiterated his expectations that the Fed will move to raise interest rates by September—or perhaps even in June.

"They would move for two reasons ... the economy is improving, the labor market is healing, and there is a good genuine debate as to how close are we to the natural rate of unemployment," El-Erian said. "The second is they're uncomfortable being at zero."

Read MoreEl Erian: Expect a Fed rate hike by September

He explained that despite the zero interest rate policy lasting for several years, the Fed now has enough reasons to move, that it can act on its discomfort. Those worries, he said, are based on what the policy may be doing to resource allocation, and that the markets may be coming to consider zero as "normal."

El-Erian said he expects the central bank to strengthen forward guidance to make sure that investors are focused on a "gradual journey" of rate increases.

"Yes, they start moving, but they start moving in a very qualified manner," he said.