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4 ETF Strategies that Deny "Sell in May and Go Away"

With the start of May, investors have duly turned cautious given that seasonality will play a huge role in pushing stocks down for 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 study from Bespoke, the S&P 500 delivered an average of just 0.85% gains from May to October in contrast to the average gains of 6.3% in the November–April period over the past 20 years. The feeble trend will likely continue this year as well given the sluggish fundamentals and global growth concerns (read: S&P 500 Again Shows Weakness: Go Short with These ETFs).

Weak Backdrop

Though the job market is accelerating, global uncertainty, the plunge in oil prices and average stagnant wage growth has taken a toll on U.S. growth. This is especially true, as the economy expanded at the slowest pace in two years in the first quarter due to weak consumer spending, sluggish business investments and reduced exports.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased just 1.9%, down from 2.4% growth recorded in the fourth quarter. The recent consumer sentiment survey for April also exhibits a downbeat tone. The final University of Michigan index came in at the lowest level of 89 in seven months, down from 91 in March while the Consumer Confidence Index slumped to 94.2 from 96.1 in March.

In addition, U.S. manufacturing in April fell to the lowest level since September 2009, as per the flash manufacturing purchasing managers’ index from Markit. Further, housing market recovery seems to be stalling this year, with three consecutive months of decline in new home sales, drop in housing starts to the lowest level since October, and permits for future home construction hitting a one-year low (read: Are Housing ETFs Ready to Ride on Spring Selling Season?).

Given the dwindling macro environment and historical underperformance of the stocks, it is true that investors should avoid taking positions in stocks during the next six-month period. However, it might be foolish to quit the stock market altogether. As a result, we have highlighted certain techniques or strategies for investors that could lead be a winning portfolio in such a rough time.

Invest in Defensive ETFs

Investors could try out safer avenues and rotate into defensive sectors like consumer staples and utilities, which generally outperform during periods of low growth and high uncertainty. Additionally, this is a much better option than holding cash (read: Defensive Stocks & ETFs for Portfolio Protection).
As such, defensive ETFs seem to be good plays for the next few months. The top-ranked fund is Guggenheim Defensive ETF (DEF) with a Zacks ETF Rank of 2 or ‘Buy’ rating, suggesting that it will outperform its peers in the months ahead. This fund offers equal-weight exposure to stocks of defensive sectors that have historically outperformed in down markets. It helps the portfolio to better weather periods of heightened volatility, while remaining positioned to take advantage of market upswings.
The other popular funds include Utilities Select Sector SPDR (XLU), Vanguard Utilities ETF (VPU), Consumer Staples Select Sector SPDR Fund (XLP) and Vanguard Consumer Staples ETF (VDC). These have a Zacks ETFs Rank of 3 or ‘Hold’ rating (read: Consumer Staples ETF (VDC) Hits New 52-Week High).

Beat the Market with Low Volatility ETFs

Low volatility products have the potential to outpace the broader market in bearish market conditions or in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these funds allocate higher to the defensive sectors, which usually have a higher distribution yield than the broader markets.

As a result, low-volatility strategies appear safe amid market turbulence, and reduce losses in declining markets while generating decent returns when the markets rise. While there are several options in the space, the two most popular ones are PowerShares S&P 500 Low Volatility Fund (SPLV) and iShares MSCI USA Minimum Volatility Index Fund (USMV). Both funds have a Zacks ETF Rank of 2 (read: Low Volatility ETFs Still in Play).

Focus on Low Beta ETFs

In an uncertain market environment, a focus on low beta stocks is usually warranted. These securities tend to exhibit greater levels of stability than their market-sensitive counterparts, and usually lose less when the market is crumbling, making this strategy safe and resilient in rocky markets. Some of the funds that needs attention are QuantShares U.S. Market Neutral Size Fund (SIZ), QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL) and PowerShares Russell 1000 Low Beta Equal Weight Portfolio (USLB) (read: 6 Nutritious ETFs to Consider on World Health Day).

Go Short With Inverse ETFs

Investors worried about the May swoon could also go short on stocks via ETFs. There are a number of inverse or leveraged inverse products currently available in the market that offer inverse (opposite) exposure to the various stock market indexes. While a leveraged play might be a risky option, inverse ETFs are interesting choices and provide hedging strategies in a bearish market.

Below are the most popular options in this space for each market cap. Each of these is from a single issuer – Proshares:
Short S&P 500 ETF (SH) and Short Dow30 (DOG) provide inverse exposure to large cap stocks. Short S&P 500 ETF offers opposite performance of the S&P 500 while Short Dow30 targets the Dow Jones Industrial Average. Short QQQ ETF (PSQ) seeks to deliver the opposite return of the Nasdaq 100 index (see: all Inverse Equity ETFs here).
Short MidCap400 (MYY) and Short Russell 2000 ETF (RWM) target the inverse performance of the mid and small cap segments of the broader U.S. market by tracking the S&P MidCap 400 and Russell 2000 indexes. Likewise, investors could also apply short strategies in different sectors through ETFs.
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GUGG-DEF EQUITY (DEF): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
VIPERS-UTIL (VPU): ETF Research Reports
SPDR-CONS STPL (XLP): ETF Research Reports
VIPERS-CONS STA (VDC): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
QS-US MN AN-BET (BTAL): ETF Research Reports
PWRSH-RU LBEWP (USLB): ETF Research Reports
PRO-SHRT S&P500 (SH): ETF Research Reports
PRO-SHRT DOW30 (DOG): ETF Research Reports
PRO-SHRT QQQ (PSQ): ETF Research Reports
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