There are seasonal trends in the equity markets and investors can take advantage of a seasonal rotation ETF strategy to provide exposure to areas that have historically performed better during certain periods of the year.
In the recent webcast, A Seasonal Strategy for Today’s Portfolio, Sam Stovall, Chief Investment Strategist, CFRA, outlined the ongoing growth potential in the equity markets ahead, with no real recessions on the horizon. Action Economics, CFRA, S&P Global Market Intelligence anticipate global earnings-per-share growth to exhibit a broad recovery for 2020 after the slump this year.
Nevertheless, the markets will still exhibit uneven growth when investors look closer to specific market segments. For example, Stovall underscored the historical outperformance of the S&P 500 during the fourth quarter after the seasonally weak third quarter period. Looking closer at S&P 500 sectors during the fourth quarter, he noted that information technology, industrials, consumer discretionary and consumer staples segments typically outperform, whereas real estate, energy and utilities fall behind.
Many investors may have heard the saying, “Sell in May, then go away”. The adage does come with a hint of truth. Stovall pointed out that the worst period for the average S&P 500 six month price change since World War II occurred during the May through October period. On the other hand, the S&P 500 generated its best average price change during the November through April period.
This average six-month price change phenomenon is not only limited to the S&P 500 as the S&P Equal Weight 500 Index, S&P SmallCap 600 Index and S&P Global 1200 Index also showed similar trends of underperformance and outperformance during the summer and winter months, respectively.
Stovall explained that the equity market seasonal trends may also be attributed to capital inflows and market movements. For example, over the first quarter, he sees strong payroll and money flows as bonuses are paid early in the year, 401(k)s get maxed out, IRAs need to be funded and overpaid tax returns are filed early.
Consequently, Stovall argued that investors could leverage this seasonal ebb and flow to potentially enhance portfolio returns through something like the Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF (NYSEArca: SZNE).
The Pacer CFRA-Stovall Equal Weight Seasonal Rotation ETF has helped investors generated improved risk-adjusted returns by diminishing downside risks when times are tough and helping investors capture upside potential during bullish times. For example, in 2018, the S&P Equal Weight 500 Index fell -7.6%, compared to the -2.4 dip for the CFRA-Stovall Seasonal Rotation Custom Index. On the other hand, the CFRA-Stovall Seasonal Rotation Custom Index increased 25.9% so far this year while the S&P 500 Index advanced 20.1%.
Sean O’Hara, President, Pacer ETFs Distributors, Pacer ETFs, explained that SZNE is an objective-rules-based strategy that rotates between six sectors semi-annually base don seasonal sector strengths. From November through April, SZNE will track an equal weight exposure to companies in the consumer discretionary, industrials, information technology and material sectors. On the other hand, from May through October during the perceived down months, the ETF will be exposed to companies in the defensive sectors of consumer staples and health care.
Financial advisors who are interested in learning more about a seasonal rotation strategy can watch the webcast here on demand.
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