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Don't Sell in May, Buy These Top-Ranked ETFs Instead

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Wall Street has seen a wobbly start to May 2022 much in line with the old adage, “sell in May and go away,” after a brutal April and the worst start to a year since 1939. The S&P 500 and the Dow Jones are striving hard to make an ascent in May, and the Nasdaq is finding it difficuly too.

In April, the S&P 500, the Dow Jones, the Nasdaq Composite and the Russell 2000 declined 9.11%, 5.3%, 13.5% and 10.9%, respectively. FAANG stocks plus Microsoft lost $1.4 trillion in market value during April, per a MarketWatch article. 

Super-hot inflation, the resultant super-hawkish Fed cues, the Russia-Ukraine war and the resultant upheaval in the investment world, sky-high commodity prices, the worst COVID-19 outbreak in China and the Asian country’s strict zero-covid policy, and the consequent supply chain woes have been bothering the investment world. Global growth worries are rife now.

Should You Go by the “Sell in May” Saying?

Probably not. Things are totally different this year, with the world experiencing one of the worst crises. So, walking along the regular path won’t make you profitable this time. Let's delve a little deeper.  

The proverb is ingrained in the S&P 500’s awful historical run for the May-to-October period. May has been a subdued month with average gains of 0.09% since 1950. Per EquityClock, the S&P 500 has added about 0.4% on average in May and the frequency of gains is 70%. But the saying hasn’t held well in recent times. 

Per an article published on CNN.com, the proverb proved itself wrong in the past few years, with the May-October period turning pretty profitable.

Since 2011, we had only one year (i.e. 2011) when the stock market crashed (down 7.1%) during the May-October period, followed by meager gains in 2012 (up 2.2%), 2015 (up 0.8%) and 2018 (up 3.4%), per a Motley Fool article.

This year, the market has seen enough slump. The speculation of faster Fed rate hikes is baked in the current Wall Street valuation. China has hinted at promoting growth through stimulus measures and as well as by easing the crackdown in tech companies.

Against this backdrop, we highlight a few ETFs that could shower gains on investors in an otherwise defamed May. Since a hawkish Fed caused a rally in long-term rates, ETFs that give shelter against rising rates should rise.

Top-Ranked ETFs in Focus

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) – Zacks Rank #1 (Strong Buy)

Anemic growth in developed economies, the QE scenario and muted bond yields have kept value investing subdued in the past decade and boosted growth stocks. But the scenario is changing now. Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings.

And this is where value investing rises. Value stocks perform better in a rising rate environment. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation (read: Why Value ETFs May Outdo Growth for the Rest of 2022).

SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) – Zacks Rank #1

The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The fund charges 7 bps in fees and yields 3.62% annually.

This high dividend yield makes them good picks as the yield beats the current benchmark Treasury yields. Even if the fund ends up seeing capital losses by chance, high dividend will go a long way to make up for the losses.

Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) – Zacks Rank #2 (Buy)

Though the American economy shrank an annualized 1.4% sequentially in Q1 of 2022, one thing sure from the GDP scorecard is that consumer demand is strong. The personal savings rate — personal savings as a percentage of disposable personal income — was 6.6% in the first quarter compared with 7.7% in the fourth quarter. It shows that consumers are shelling out more than the previous periods. The increase in personal consumption expenditure reflected increases.

Consumer companies are hiking prices; for example, Unilever hiked prices by more than 8% as cost pressures mount to offset higher supply chain and energy costs, more than outweighing a dip in sales volumes. This ensures a rally in consumer stocks and ETFs in the coming days.

SPDR S&P Bank ETF (KBE - Free Report) – Zacks Rank #2

Banks are in the sweetest spot as decent household savings rule out the fear pf delinquencies or default on loans. In any case, banking is an undervalued sector currently. Earnings have been upbeat in the sector. A prospective rising rate environment is another plus for the banking stocks. KBE is thus a good bet.