The decade-long bull run was one for the ages, but the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (NYSEArca: SZNE) is certainly one for the seasons, and October’s volatility served as a reminder to investors that alternative strategies like seasonal investing are worth considering.
Despite ending on a positive note, October 2018 has been one to forget for U.S. equities thanks to FANG (Facebook, Amazon, Netflix, Google-Alphabet) stocks that have haunted the major indexes during the month of October: Facebook—down 7%, Amazon—down 21%, Netflix—down 20%, and Google (Alphabet)—down 10%. The Nasdaq Composite, in particular, fell by 9.2% in October, making it its second largest decline since it fell 10.8% back in November 2008.
Investors were rocked by copious amounts of volatility after a decade-long bull run that has seen the growth fueled by FANG stocks dwindle as the technology sector fell into correction territory. The Nasdaq was able to pull itself out of correction territory on the final day of October, but the entire month made investors reticent to jump back into the same tech sector that spurred the historic bull market.
However, a move back into tech is par for course per SZNE’s market strategy for November through April.
Related: ETF of the Week: Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (SZNE)
Diversification through Rotation
Diversification is an obvious benefit of exchange-traded funds as opposed to concentrating investment capital into a single stock, but SZNE offers the same diversification via the ETF wrapper. SZNE tracks certain sectors found within the S&P 500 Equal Weight Index, but with a twist–getting diversified at the right time at the right season.
From November through April, the fund will offer equal weight exposure to companies in the consumer discretionary, industrials, information technology and material sectors. From May through October, the ETF will be exposed to companies in the defensive sectors of consumer staples and health care.
SZNE serves as a prime alternative for the large-cap investor seeking exposure to various sectors, but only during the times of the year when they are thriving.
“The ideal investor for SZNE is core Large Cap long-term investor,” said Sean O’Hara, president of Pacer ETFs. “The premise for the ETF is based on the old Wall St. adage of ‘sell in May and go away.’ There have been patterns that are long standing that show that different sectors do better than others historically during certain months during the year.”
Pacer ETFs have been able to identify which sectors perform the best during which season–the premise for SZNE’s strategy.
“The defensive sectors, Health Care and Consumer Staples, have performed better than the overall market during the period May through October,” said O’Hara. “The period between November through April shows that Consumer Discretionary, Info Tech, Materials and Industrials have historically performed better than the overall market. So, the ideal investor for SZNE is a long-term Investor who desires an alternative to simply buying the broad market through one of the cheap beta ETFs because they seek to receive higher returns over time.”
Resilience in the Face of External Factors
While the month of October was racked by volatility, the capital markets have been tested by persistent trade wars constantly, particularly between the United States and China. Today, the markets got a boost when U.S. President Donald Trump tweeted that he “just had a long and very good conversation with President Xi Jinping of China,” signaling that trade negotiations with the second largest economy are moving forward positively.
When trade wars were racking the markets, SZNE was able to neutralize its effects via the seasonal rotation strategy since it launched in late July–credit that to a move into health care and consumer staples.
“Since its launch, SZNE has been less reactive to some of the external shocks in the market like trade, because of how it is allocated currently in health care and staples,” said O’Hara. “Health care names have been less sensitive to the overall threat of trade and tariffs.”
Furthermore, since the fund utilizes a passive strategy, haphazard adjustments to the portfolio are avoided even during trying times, such as October’s volatility. It speaks to SZNE’s resilience in the markets and its unflinching strategy–“sell in May and go away” can be supplemented with “trust the process.”
“There were and will be no adjustments to the Index or Portfolio due to any outside influence as it is designed to be and is a passive strategy,” said O’Hara.
Pacer ETFs is focused on addressing investors’ needs through its four fund families, the Pacer Trendpilot Series, Pacer Cash Cows Index Series, Pacer Leaders Series and Pacer Custom ETF Series. Pacer ETFs employ a rules-based, passive management approach to track S&P, NASDAQ, FTSE Russell, and Custom Indexes.
Investors can visit PacerETFs for more information on their various funds.
For more market news, visit ETFTrends.com.