Sell in May: Stock ETFs Under the Gun

May 14th at 2:40pm by Tom Lydon

The recent weakness of stock ETFs on Europe’s debt woes has many investors wondering if they should’ve heeded the old adage to sell in May and go away. The question is whether to stay the course or to wait on the sidelines during the summer, which is traditionally a slower time for the markets.

“Last year, investors who employed the ‘sell in May’ strategy averted an almost 17% drop in the S&P 500 and a nearly 25% drop in the MSCI Emerging Markets Index from June-September. Summer of 2010 was a similar experience. Historically, you have a fifty-fifty chance for a positive gain during those months, while your odds are roughly 10% better during the rest of the year,” Frank Holmes wrote on the Business Insider.

Russ Koesterich for iShares Blog reports that, yes, investors should consider lightening up their portfolios in May in preparation for summer, but taking a more defensive stance is not based upon the month of the year, rather, the market uncertainty. [Seasonal Trends May Weigh on Stock ETFs]

The VIX, the stock market’s volatility bellwether, has pushed above the the April high mark.  As of Thursday, the VIX fell to 19%, leaving the index about 6% above an important short-term line, reports Chris Tyler for Investor’s Business Daily. A bearish alignment of the VIX and the “Sell in May” theory would be kicked into action if the index fell below a one-month low of 15.8%, reports Tyler.

Koesterich suggests that investors lighten up on equity exposure now, and investing in more defensive sectors. For instance, after last Friday’s sell-off, a global telecom ETF has outperformed the global market. iShares S&P Global Telecommunications Sector Index Fund (NYSEArca: IXP) has grabbed investor interest since the April peak. [ETF Chart of the Day: Global Funds]

Furthermore, global mega-cap shares and high dividend funds continue to take the spotlight. The popular iShares High Dividend Equity Fund (NYSEArca: HDV) rose to a new high last week. Dividend-focused ETFs have maintained good performance over the past 6 months as investors have searched for yield in this low-yield market. Plus, the diversification of an ETF helps mitigate extra market volatility. [Dividend ETFs May See Higher Payouts]

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Tickers

HDV IXP