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Santa Claus Rally: 3 ETFs on the Nice List

RPG FTC SCHG

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Good tidings come for the U.S. equity markets, with gains of 26.5% for the S&P 500 and 22.2% for Dow Jones in the year-to-date time frame. Unlike the lackluster rally in 2012, the bull trend could definitely continue this December if the Santa Claus rally proves to be real.
 
According to market belief, December has a proven track record of being a top performing month for the S&P 500. The stocks tend to move up in the anticipation of various factors such as general holiday season cheer, tax-related affairs, and people investing their Christmas bonus. This holiday bonanza is called a ‘Santa Claus Rally’ (read: 3 ETFs For This Holiday Season).
 
Over 50 years, the S&P 500 has a track record of gaining 1.9% on average in the month of December. In fact, according to the Stock Trader’s Almanac, the biggest jump in stocks can be seen through the final week of a calendar year (i.e. between Christmas and New Year Day).
 
Here Comes a Santa Claus Rally
 
Given strong macro trends and increased investors’ appetite for riskier assets (i.e. equities over bonds), it appears that 2013 would see the best Santa Claus rally in the past few years. This is especially true given that equity ETFs/ETPs have pulled in a total of $213.5 billion funds since the start of the year through November end. This is higher than $124.4 billion seen in the year-ago period.
 
Additionally, a slew of positive economic data on employment, manufacturing, housing, consumer spending, and GDP growth supports the Santa Claus rally. The economy created 203,000 jobs in November, leading to a decline in the unemployment rate to 7% from 7.3%.
 
Further, the political gridlock between the White House and Republican lawmakers seems to have eased with a tentative two-year budget deal, which if approved would end the three years of impasse and fiscal instability in Washington. This move is definitely a positive step for the economy and the stock markets as a whole.
 
Improving conditions in Europe and China would further propel the market higher.
 
Though upbeat data and strong momentum in the economy has raised market speculation over the Fed curtailing its QE3 program and spread panic in market, a big taper in the near future still seems unlikely.
 
The unemployment scenario has brightened a bit, but inflation is still low at 1.1% in November. Further, the U.S. consumer confidence continued to decline and dropped to a seven-month low in November (read: 3 Covered Call ETFs to Pump Up Your Income).
 
Moreover, even if the Fed tapers, market experts think that the economy and financial markets could well endure the Fed’s wind-down plan, suggesting good trading ahead. As a result, the Fed’s curbing of QE3 does not seem to be much of an issue and Santa Claus could even bring gifts for various sectors and asset classes in the days ahead.
 
ETFs to Consider
 
For investors seeking to ride out the Santa Claus rally, we have highlighted some of the ETFs that provide a broad diversified play in various sectors rather than specific ones. These products have been leading the large cap space for most of this year, clearly outpacing the broad market fund (SPY) by a wide margin.
 
These funds have a top Zacks ETF Rank of 1 or ‘Strong Buy’, suggesting that the outperformance will continue in the coming months as well (see: all Large Cap ETFs here).  
 
Guggenheim S&P 500 Pure Growth ETF (RPG)
 
This ETF tracks the S&P 500 Pure Growth Index, holding 112 securities in its basket. The fund is widely diversified across various securities as none of these holds more than 2.7% of total assets in the basket.
 
However, the product has a slight tilt toward the consumer discretionary sector accounting for nearly 30% share while healthcare, information technology and financials round out the next three spots (read: Is This ETF a Better Bet in the Consumer Space?).
 
The fund has amassed $850.2 million in its asset base while it trades in moderate volume. The ETF charges 0.35% in expenses and returned over 39% so far this year. 
 
First Trust Large Cap Growth AlphaDEX Fund (FTC)
 
This fund provides a slightly active choice as it uses the AlphaDEX methodology to select the stocks. The methodology seeks to narrow the large cap space to only the best positioned growth companies, eliminating the bottom ranked 25% of the stocks.
 
This approach produces a basket of 177 stocks, which is widely spread across various securities as each security holds less than 1.1% of assets. In terms of sectors, the product is skewed toward consumer discretionary with nearly 30% share, followed by industrials (19.21%), information technology (15.39%) and healthcare (11.42%).
 
The fund is quite unpopular with AUM of $212.2 million while volume is light. This ensures additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.70%. FTC added 33.5% in the year-to-date time frame.
 
Schwab U.S. Large-Cap Growth ETF (SCHG)
 
This ETF follows the Dow Jones U.S. Large-Cap Growth Total Stock Market Index and holds 392 stocks in its basket. The fund has a large allocation of 5.8% in the top firm – Apple (AAPL) – while other firms hold less than 3.5% of total assets (read: 3 Apple-Focused ETFs to Buy This Holiday Season).
 
The product is also heavy in information technology with 27.8% share while healthcare, consumer discretionary and industrials also get double-digit exposure in the portfolio. The fund has accumulated over $1 billion in its asset base while it trades in good volume of nearly 121,000 shares a day.
 
SCHG is the low cost choice in the space, charging just 7 bps in fees per year from investors. The ETF is up 31% year-to-date.

Bottom Line
 
Yes, investors, there is a Santa Claus rally. And these large cap growth funds, seem to be three products that are the likely winners for the Christmas trend. So look for these to generate above average returns compared to others in the space, especially when the markets are rising and investors are feeling cheerful about the economy.
 
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