How To Trade “Sell In May And Go Away” With ETFs

Though the U.S. bourses are hovering at their peak levels this year, they are easily lagging the broad market indices. This is especially true given that SPDR S&P 500 (SPY – Free Report) , tracking the S&P 500, has gained 7.1% this year versus 8.6% for the iShares MSCI ACWI ETF (ACWI – Free Report) , targeting the global stock market.

The underperformance is likely to persist as seasonality is expected to play a huge role in pushing stocks down over the next six months as per the old adage “Sell in May and Go Away”. According to this investment saying, the stock market has a long history of weak performance during the summer months (May to October).

According to the latest study from Fidelity, the S&P 500 has delivered an average of just 2% gains from May to October in contrast to the average gains of 5% in the November–April period since 1928. Further, Sam Stovall, CFRA’s chief investment strategist, has found that the election played an important role in this seasonal pattern. As for first-term presidents, Democrats averaged a 6.1% gain in May through October, while Republicans had a loss of 4% if history is any guide. In fact, first-term Republican Presidents see bigger ‘sell in May’ phenomena than Democrats.

Apart from the historical trend, feeble data, uncertain Trump’s pro-growth policies, lofty valuations, and geopolitical tensions will keep the returns at check going forward. However, the bullish sentiment for the stocks remains intact with U.S. consumer confidence hovering around a 16-year high.

The labor market has been on solid footing with the unemployment rate of 4.5% being at a 10-year low and the number of job creations outstripping growth in the working-age population. Additionally, investors are optimistic about first-quarter earnings, which seem robust with earnings and revenue growth for the period currently tracking above the other recent periods.

Against a mixed backdrop, it might be foolish to quit the stock market altogether. Instead, investors could rotate into the defensive sectors or low risk securities during this soft six-month period. As such, we have highlighted certain techniques for investors that could lead to a winning portfolio in such a rough time.

Invest in Defensive ETFs

Investors could try out safer avenues and rotate into defensive sectors, like utilities, healthcare, and consumer staples, which generally outperform during periods of low growth and high uncertainty. Additionally, this is a much better option than holding cash. Guggenheim Defensive Equity ETF (DEF – Free Report) having Zacks ETF Rank of 3 or ‘Hold’ rating could be an excellent choice. This fund offers equal-weight exposure to all the stocks in the index, resulting in a more balanced and diversified portfolio. It helps the portfolio to better weather periods of volatility, while remaining positioned to take advantage of market upswings.

The other popular Zacks Rank #3 ETFs include Consumer Staples Select Sector SPDR Fund (XLP – Free Report) , Vanguard Consumer Staples ETF (VDC – Free Report) , Shares U.S. Consumer Goods ETF (IYK – Free Report) , SPDR Health Care Select Sector SPDR Fund (XLV – Free Report) , Vanguard Health Care ETF (VHT – Free Report) and iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH – Free Report).