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ETF Strategies to Profit From a Historically Weak September

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After a smooth ride in August, Wall Street has entered into a historically weak month. Since 1928, the month of September has generated an average negative return of 0.1% for the stock market, with a win-ratio of only 46%, according to data from Fundstrat.

The S&P 500 has delivered an average negative return of 0.56% since 1945, according to Sam Stovall, chief investment strategist at CFRA. The S&P has advanced only 45% of the time in September, the lowest rate of any month. Per Barron’s article, the average September return for the S&P 500 has been at a loss of 0.99% over the years dating back to 1928. That makes the month far worse than May, which ranks second in bringing gloom to investors with an average loss of 0.11% (read:Best ETF Areas for Placing Your Bets in September).

Last year, even in the face of a rapid recovery from the COVID-19 pandemic, stocks saw nearly 10% correction in the middle of September.

The declines are due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

Will History Repeat?

The S&P 500 has been on the longest winning streak since the 10-month run that ended in December 2017, setting 53 record highs so far this year. Hopes over economic recovery backed by widespread vaccine rollout and an expanded stimulus, have been the major catalysts. Additionally, strong corporate earnings growth and vaccine optimism are driving the stocks higher (read: What Awaits the S&P 500 ETFs After the Best YTD Rally Since 1997?).

Driven by these factors and lower rates, Wall Street analysts have become more optimistic and bullish on stocks in almost two decades. In fact, Fundstrat, data shows strong equity returns in September when markets see a strong first half of the year. In the years since 1928 when the S&P 500 rose more than 13% for the first six months, the index’s median September gain was 1.4%. Through June this year, the broad market benchmark has rallied 14%.

However, the spread of the Delta variant of COVID-19 poses risk to the growth. The United States is now averaging nearly 158,000 new COVID-19 cases over the last seven days and vaccination rates have slowed down since April. About 53% of the population is fully vaccinated so far in the country and 62.3% have received their first doses of a vaccine with nearly seven-day moving average of 578,000 doses administered compared to about 3.5 million in mid-April.

Investors should note that the stock market bulls are roaring higher this year, easily shrugging off all the fears, and are expected to continue to do so this month as well. So, investors seeking to remain invested in the equity world should consider some strategies to overcome the weak trends. For them, we have highlighted four of them:

Focus on Low Volatility

Low-volatility ETFs have the potential to outpace the broader market in bearish conditions or in an uncertain environment while providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. ETFs like iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) could be compelling choices. These have a Zacks ETF Rank #3 (Hold).

Bet on Quality

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.

Among the most popular are iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barron's 400 ETF (BFOR - Free Report) .

Overweight Technology

The technology sector has been performing well lately and is expected to do so this month given the Fed’s continued dovish stance. Though the central bank will gradually begin tapering $120 billion in monthly bond purchases by the end of the year, it is in no hurry to raise interest rates. A faster economic recovery and robust earnings should add to the strength. Even if COVID-19 continues to surge, the tech sector will likely outperform. This is because the pandemic will further bolster the global digital shift, leading to the acceleration in e-commerce for everything, ranging from remote working to entertainment and shopping (read: Tech Sector Outperforms in August: 5 Best ETFs).

Given this, investors should bet on the top-ranked (Zacks ETF Rank #1 (Strong Buy) or #2 (Buy)) and the most-popular ETFs from the space to gain most. Some of these include Vanguard Information Technology ETF (VGT - Free Report) , First Trust Dow Jones Internet ETF (FDN - Free Report) , iShares U.S. Technology ETF (IYW - Free Report) and First Trust Cloud Computing ETF (SKYY - Free Report) .

Add Value

Value stocks have proven to be outperformers over the long term and are less susceptible to the trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts (read: 5 Top-Ranked Mega-Cap ETFs Scaling New Highs).

Some of the Zacks ETF Rank #2 ETFs are Vanguard Value ETF (VTV - Free Report) , Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) , and Vanguard Mega Cap Value ETF (MGV - Free Report) .

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