In the traditional slow period of the year, many investors have engaged in the time-honored tradition of “Sell in May,” capitalizing on defensive and high-yielding sector exchange traded funds that usually outperform in the May Through October timeframe.
Historically, consumer staples and health care sectors outperform during the slow period of May through October while high-yielding real estate and utilities topped the charts as well, Lindsey Bell, Investment Strategist for CFRA, said in a research note.
However, there were some surprises this time around. For instance, the technology sector, along with related ETFs like the Technology Select Sector SPDR (NYSEArca: XLK), Fidelity MSCI Information Technology Index ETF (NYSEArca: FTEC) and Vanguard Information Technology ETF (NYSEArca: VGT), have dominated markets this year, bolstering markets and lifting the S&P 500 toward record highs.
Additionally, utilities stocks, along with sector-related ETFs like Utilities Select Sector SPDR (NYSEArca: XLU), Vanguard Utilities ETF (NYSEARCA: VPU) and Fidelity MSCI Utilities Index ETF (NYSEARCA: FUTY), took charge once the seasonal period began. Since May 1, utilities gained 7.1%, compared to the 2.3% rise in the S&P 500 and 6.0% increase in the tech sector.
Furthermore, utilities shows a robust 3.4% yield, the second highest in the S&P 500, which has been particularly attractive in a stubbornly low-yielding environment. The sector is also the third best performer since the start of the year, jumping 13% and only lagging behind the 22% gain in tech and 15 increase in health care. On average since 1990, utilities have outperformed the S&P 500 46% of the time between the May and October months., making it the fifth best performing sector over the period.
“This year’s outperformance has been a noticeable outlier as investors searched for yield from a sector with a defensive hedge,” Bell said.
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Meanwhile, the health care segment, along with the Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC), Health Care Select Sector SPDR (NYSEArca: XLV) and Vanguard Health Care ETF (NYSEArca: VHT), the historically best-performing sector during the summer, is up 4.9%. The sector has been the third best area from May, which is in line with historical averages of 4.7%. Historically, the sector has beat the broader market index 64% of the time.
On the other hand, the performance or lack of gains in the consumer staples sector has been rather surprising as the defensive sector has typically done well during the summer doldrums – consumer staples have historically been the second best performing area. However, consumer staple stocks dipped -0.6% since May. The other underperforming sectors include energy, which fell 7.7%, and consumer discretionary, which dipped 1.7%.
With two more months remaining, sector ETF investors may still have more room to maneuver, especially in healthcare.
“Looking across consumer staples, health care, real estate and utilities, the valuation would suggest that health care has the best upside opportunity,” Bell said. “CFRA upgraded health care to overweight from marketweight just two weeks ago due to the reduced likelihood of repealing and replacing the Affordable Care Act in 2017, as well as an expected overall improvement in operations.”
For more information on market sectors, visit our sector ETFs category.