Back to top

Image: Shutterstock

September Effect and ETFs: What Lies Ahead for Investors?

Read MoreHide Full Article

Despite witnessing volatility, August proved positive for the S&P 500 index, where the broad market index gained 3.6%. However, the potential uncertainty driven by “the September effect” is a concerning factor.

A classic calendar-based market anomaly, the September effect, refers to the historically weaker market returns witnessed in the month, as quoted on Investopedia. Over the past century, September has proven to be the worst month for Wall Street on average.

Traditionally, U.S. equities have delivered strong returns in August, whereas September stands out as the only month that posts negative average returns, according to Reuters.

Data Behind the Anomaly

Per Yahoo Finance, in September alone, the S&P 500 index has averaged a decline of approximately 4.2% over the past five years and more than 2% over the last 10 years.

Taking a broader historical perspective, Investopedia states that the S&P 500 index has, on average, declined approximately 1% in September over the last century. However, since 1928, stocks have declined in September 55% of the time, marking the likelihood of a negative return for the month just slightly above 50/50.

Why Markets Struggle in September

Per Investopedia, the September decline is partly caused by investors seeking to lock in profits and tax losses before the year-end and partly by investors selling stocks to cover back-to-school expenses.

Institutional investors looking to liquidate their holdings for tax loss harvesting at the end of the quarter also contribute to the decline. Additionally, another theory suggests that because investors anticipate the September Effect, market psychology kicks in and sentiment turns negative in line with those expectations.

However, beyond these theoretical headwinds, the existing sources of market volatility strengthen the case for the market anomaly. Concerns about the Fed’s independence and the legal uncertainty surrounding the Trump administration’s tariffs contribute to the increasingly volatile macroeconomic environment.

Additionally, continued geopolitical and economic instability and persistent inflation concerns have continued to make investors nervous.

How Should Investors Respond to the Market Anomaly?

Preserving capital and cushioning volatility is key for investors looking to navigate a volatile period. Investors should adopt a defensive approach as it's better to be cautious than unprepared.

With ETFs offering the additional benefit of instant diversification and tax efficiency, investors can use them to increase exposure to defensive funds. Investing in these sectors provides dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.

ETFs to Consider

Below, we highlight a few areas in which investors can increase their exposure.

Consumer Staple ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns (Read: Here's Why It's Time to Revisit Consumer Staples ETFs).

The S&P 500 Consumer Staples Index has gained 4.01% year to date. Investors can consider Consumer Staples Select Sector SPDR Fund (XLP - Free Report) , Vanguard Consumer Staples ETF (VDC - Free Report) and iShares U.S. Consumer Staples ETF (IYK - Free Report) .

Gold ETFs

Investors can also consider funds such as SPDR Gold Shares (GLD - Free Report) , iShares Gold Trust (IAU - Free Report) and SPDR Gold MiniShares Trust (GLDM - Free Report) , increasing their exposure to the yellow metal. Across extended investment periods, gold preserves its purchasing power, outpacing inflation.

Additionally, gold remains a secure choice amid economic and geopolitical instability.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantages of safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF (VIG - Free Report) , Schwab US Dividend Equity ETF (SCHD - Free Report) and Vanguard High Dividend Yield Index ETF (VYM - Free Report) , which have dividend yields of 1.68%, 3.68% and 2.54%, respectively.

More Defensive Options

Investors can consider quality and value funds if they want to increase their exposure to more defensive funds. Funds like Vanguard Value ETF (VTV - Free Report) and iShares MSCI USA Quality Factor ETF (QUAL - Free Report) are good options.

Investors can also increase exposure to volatility ETFs like iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) . These funds have delivered short-term gains during periods of market chaos and could climb further if volatility persists.

Published in