The beginning of November is an opportune time to check in on the age-old “Sell in May” strategy of remaining invested. This strategy has developed over time and turned into an easy one to implement with the proliferation of sector-based ETFs.
The approach began as a more rudimentary strategy that simply leveraged years and years of data to limit losses in equity markets. The 6 month season dating November through April has historically seen greater returns than the 6 months following. Originally the approach was to “Sell in May And Go Away”, according to Investopedia, but that has evolved into an approach that remains invested but rotates sector exposure.
Sam Stovall, U.S. Equity Strategist at S&P Capital IQ, explained in a research note, “A hypothetical investor could have done one of three things using ETFs that mimic market and sector indices: 1) He could have owned the S&P 500 all year long, earning a compound annual growth rate (price only) of 7.1% since April 30, 1995, a period consistent with four global S&P indices, 2) He could have engaged in a semi-annual rotation strategy, owning the S&P 500 from November through April, but then taking a 50% stake in both the S&P 500 Consumer Staples and Health Care sectors from May through October. This strategy would have earned him 10.5% per year, and it would have beaten the market 62% of the time. 3) If this same investor engaged in a full-year sector-rotation strategy, in which he had a 50% exposure to the S&P 500 Consumer Staples and Health Care sectors from May through October, and a 1/3rd exposure to the S&P 500 Consumer Discretionary, Industrials and Materials sectors from November through April, his CAGR would have jumped to 13.4%, and he would have beaten the S&P 500 71% of the time”
Diligent rebalancing and sector rotation is within every investors reach with the ease of ETF trading and the multitude of options available to track each sector.
We’ve covered multiple tailwinds that have been building for Consumer Discretionary ETFs recently and history seems to align with potential gains. (2 Reasons Consumer Discretionary ETFs Will Finish 2015 Strong). SPDR Consumer Discretionary Select Sector ETF (NYSEarca: XLY) has been on a huge rally heading into its high season. Other cyclical players include Financials, Industrials, and Materials.
The boom in equity ETF inflows last month, reported by Bloomberg, may indicate that investors are already preparing for the strong equity performance season. October saw more equity ETF inflows than in all other months of 2015 combined.