With just a day away to the month of May, investors have 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).
Will May 2018 Pen the Same Story?
After a blockbuster start, the U.S. stock market was hit by a series of hurdles including inflationary pressures, a faster-than-expected rates hike, political instability in Washington, geopolitical tension, technology sector turmoil and rising yields.
Additionally, the signal from European Central Bank to end the cheap money era policy anytime soon and the latest round of domestic economic data added to the weakness (read: ETFs to Benefit or Lose from Rising Yields).
This is especially true as America's economic growth slowed to start the year with 2.3% in the first quarter compared with 2.9% in fourth-quarter 2017 driven by weak consumer spending in nearly five years. Domestic demand rose 1.7% -- the slowest in two years -- after rising at a brisk 4.8% pace in the final three months of 2017.
However, tightening labor market conditions, lower tax rates, strong earnings expectations and increased government spending are expected to spur economic growth in the coming months, thereby resulting in a bullish condition for the stock market. In particular, the massive $1.5-trillion tax cut will create an economic surge, boosting job growth in manufacturing and other sectors, increasing inflation and interest rates. Additionally, it would lead to higher earnings, increased buyback activities and fat dividends.
Against such a backdrop, it might be foolish to quit the stock market altogether. Instead, investors could follow some ideas that could lead to a winning portfolio during this soft six-month period.
Focus on Low Volatility ETFs
As weak historical trends and volatility are expected to play foul in the stock market, low volatility ETFs appear sensible choices. This is because these have the potential to outpace the broader market in bearish-to-neutral market conditions, providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets.
While there are several options in the space, the two most popular ones are PowerShares S&P 500 Low Volatility Portfolio (SPLV - Free Report) and iShares Edge MSCI Min Vol USA ETF USMV. Both funds have a Zacks ETF Rank #3 (Hold).
Lower Risk with Low Beta ETFs
Low beta ETFs tend to exhibit greater levels of stability than their market-sensitive counterparts, and usually lose less when the market is crumbling. Though these have lower risk and lower returns, funds like PowerShares Russell 1000 Low Beta Equal Weight Portfolio USLB are considered safe and resilient in rocky markets. The product has a Zacks ETF Rank #3.
Emphasis on Value ETFs
Value stocks have proven to be outperformers over the long term and are less susceptible to 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: Why Value ETFs May Rule in Q2).
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) , Vanguard Mega Cap Value ETF MGV and PowerShares Dynamic Large Cap Value Portfolio (PWV - Free Report) .
Overweight Dividend ETFs
The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these world’s — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and ProShares S&P 500 Aristocrats ETF (NOBL - Free Report) have a Zacks ETF Rank #2 (read: Here's Why You Should Buy Dividend Growth ETFs Now).
Invest in Defensive ETFs
Investors could try out safer avenues and rotate into defensive sectors, like utilities, healthcare, and consumer staples, which generally outperform during periods of low growth and high uncertainty. Additionally, this is a much better option than holding cash. Guggenheim Defensive Equity ETF (DEF - Free Report) having a Zacks ETF Rank #2 could be an excellent choice. This fund offers equal-weight exposure to all the stocks in the index, resulting in a more balanced and diversified portfolio. It helps the portfolio to better weather periods of volatility, while remaining positioned to take advantage of market upswings.
The other popular ETFs include Consumer Staples Select Sector SPDR Fund (XLP - Free Report) , Vanguard Consumer Staples ETF (VDC - Free Report) , SPDR Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Health Care ETF (VHT - Free Report) and iShares Dow Jones U.S. Healthcare Sector Index Fund (IYH - Free Report) . All these have Zacks ETF Rank #3.
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