'Tis The Season for an ETF Rotation Strategy | ETF Trends

With the traditional weak summer months of the year behind us, exchange traded fund investors can look to a seasonal rotation strategy that capitalizes on the strength the markets typically experience during the winter season.

“To everything, there is a season, and the same goes for the stock market,” Sam Stovall, Chief Investment Strategist, CFRA, said in a recent research note. “Most investors are familiar with the old Wall Street axiom ‘Sell in May and go away.’ Tradition holds that the stock market registered the weakest six-month return from May through October and the strongest from November through April.”

From April 30 through October 25 this year, the S&P 500 rose 2.6%, or slightly ahead of the average six-month advance of 1.8% for the period since 1990.

Not surprisingly, the CFRA-Stovall Seasonal Rotation Custom Index, which acts as the underlying index for the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (NYSEArca: SZNE), has outperformed the S&P Equal Weight 500 Index through October 25 as the seasonal rotation strategy held an equal weight position of consumer staples and healthcare names.

Beating The Market

This seasonal rotation strategy has also beat the market on a total-return basis over the past one-, three-, five-, 10- and 20-year basis, as well as since its inception on April 30, 1990.

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. Pacer ETFs have been able to identify which sectors perform the best during which season–the premise for SZNE’s strategy. As more volatility rains down on U.S. equities, investors can opt for a defensive play like SZNE.

At the close of business on October 31, the strategy rotated out of the defensive sectors and into four cyclical groups, including consumer discretionary, industrials, materials and technology sectors in equal proportions until the end of April 2020. Should the seasonal trends hold, and there’s no guarantee it will, this cyclical seasonal positioning should also help SZNE outpace the broader market for the period ahead.

“Like white-water rafting, sometimes it’s best to let the market take you where it wants to go. History shows that investing in cyclical sectors from November through April, and then gravitating toward defensive groups from May through October, has made the experience both thrilling and rewarding,” Stovall added.

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