Hot Funds for Summer 2014 - Best of Funds

By Zacks Equity Research,

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The saying "Sell in May and Go Away" was not effective this time. In May, benchmarks recorded their best monthly gains since February. The S&P 500 hit new highs on certain occasions, proving investors' reluctance to follow the age-old adage of selling in May. The volatility in Internet, high-growth and bio-tech stocks have been prevalent though. The small-cap stocks have showed strength of late and the Russell 2000 has been trending up since May 20.

The summer looks a bright one so far, providing handsome returns to investors who decided not to follow the cliché. The S&P 500 has gained 2.1% in May. The S&P 500 hit a high on the last trading day of the month, the fourteenth time it notched an all-time high this year. The Dow and the Nasdaq gained 0.8% and 3.1%, respectively. The Dow too closed at a record high on May 30.

The equity funds should have been cashing in the gains given the strong rally. Equity funds invest in stocks and there are certain strong winners in May which outperformed the broader markets.

However, before we pick the likely winners for the summer, let's take a look at what is Sell in May & Go Away is, how the benchmarks performed and what happened in May this year.

Sell in May & Go Away

The saying , Sell in May and Go Away, reportedly dates back to 1930s. Traders back then would say, "sell in May and go away, stay away till St. Leger Day". 

Investopedia notes: "This strategy is based on the historical underperformance of stocks in the six-month period commencing in May and ending in October, compared to the six-month period from November to April. According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period".

A general assumption behind this well-known trading adage is that excited investors seeking to get a jumpstart at the start of the year propels the stocks to overbought territory. During the summer, investors take a breather and reversing the stocks to oversold territory by the fall.

S&P Historical Performances in May

The 2014 Stock Trader's Almanac reported that S&P has lost 83 points from May to October between 1950 and 2012. This is in contrast to 1,663 points gain between November and April. It also reported that while Dow has added 16,398 points during November to April, it has lost 1,772 points from May to October.

Separately, Standard & Poor's Capital IQ Chief Equity Strategist Sam Stovall notes that since the second World War, the S&P 500 has added an average 7% from November through April. On the other hand, S&P 500 has added 1.3% from May to October. He cited "vacations and mutual-fund fiscal year-end window dressing" to be a couple of reasons behind this trend. He also mentioned the S&P 500 has lost 1.6% on average in the May to October period during midterm election years.

Benchmarks' Performance Since 2009

However, a prudent move should be to check how true the adage has been in the last five years. That should give the latest indication.

Benchmarks 2009 Performance (%) 2010 Performance (%) 2011 Performance (%)
Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May
S&P 500 19.67 18.08 13.79 7.45 11.00 -1.49 15.13 -10.94 -1.12 -7.93 14.74 -1.18
Dow 16.48 18.27 12.45 3.51 9.39 -0.30 15.15 -9.10 4.69 -6.66 13.34 -1.85
Nasdaq 39.38 24.74 20.10 3.21 12.85 0.35 14.72 -9.67 -3.21 -6.27 16.85 -1.0

Benchmarks 2012 Performance (%) 2013 Performance (%)
Yearly May-Oct Nov -Apr May Yearly May-Oct Nov -Apr May
S&P 500 11.68 0.45 11.91 -6.79 26.39 10.98 6.94 3.04
Dow 5.70 -1.38 12.15 -6.67 23.59 5.75 6.18 2.82
Nasdaq 14.00 -2.40 10.22 -7.31 34.2 18.81 4.91 4.75

The chart proves except for 2009 and 2013, the Nov-Apr period has outperformed the May-Oct performance. In 2 cases, S&P 500 has been in the red zone in May-Oct period and it avoided a negative finish in 2012 with meager gains of 0.45%.

Positives Outweigh Negatives in May

Benchmarks finished mostly lower for the first two weeks, dragged down by intense selling pressure in Internet and small-cap stocks. Also, selloffs in utilities and energy sectors had a negative impact on the benchmarks.
From May 1 - May 16, the S&P 500 had lost 0.3%. However, things reversed in the second half as S&P 500 scored gains of 2.04% from May 19-May 30.

Among the positives, gains in small-cap and high-growth stocks drove benchmarks higher for the month. Additionally, gains in consumer discretionary and energy stocks helped benchmarks finish in the green. The Nasdaq was boosted primarily by gains in bio-tech stocks.
Separately, Federal Open Market Committee's (FOMC) indication that central bank will remain flexible when it comes to raising short term interest rates was a positive. Federal Reserve Chairwoman Janet Yellen also indicated to keep the key lending rates low. Separately, Russian President Vladimir Putin's willingness to discuss measures to ease the Ukrainian crisis and dovish comments from ECB President Mario Draghi were some of the positives for the month. 

Additionally, an upward revision of March's retail sales data, encouraging small-business sentiment, upbeat services sector data, increase in ISM Services Index and better-than-expected initial claims numbers were welcomed by the investors.

Outlook for June

Most reports released last month indicate that growth will soon pick up, reversing this month's decline. According to some estimates GDP growth in the second quarter could be at 4% or even higher. However, consensus estimates indicate growth of at least 3% or more. The pace of growth is expected to accelerate over the second half of the year and this trend is expected to continue.

Benchmarks' progress into record territory reflects this inherent optimism of the U.S. economic outlook. Despite some residual weakness, technology stocks have also recovered and are expected to move upward going forward.

Funds to Buy in June

Among the S&P industry groups, Technology Select Sector SPDR (XLK) was the biggest gainer in May. It gained 3.76%.  The Materials sector followed next with gains of 2.96% and consumer discretionary and healthcare scored gains of 2.88% and 2.87%, respectively. Energy sector too added a decent 1.67%.

Here, we will suggest 3 Zacks Mutual Fund Rank #1 (Strong Buy) funds from these sectors. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performances, but the likely future success of the fund. These funds also have outperformed S&P 500's return year to date.

ProFunds Semiconductor UltraSector Service (SMPSX) invests a large share of its assets in derivatives and securities which have the potential to provide 150% return of the Dow Jones U.S. Semiconductors index's daily performance. This index tracks the performance of the US semiconductor sector's equity market.

The fund has returned 15.62% year to date, outperforming S&P 500's year-to-date return of 5.04%.

T. Rowe Price Health Sciences (PRHSX) invests the majority of its assets in common stocks of companies whose primary operations are related to health sciences. The fund focuses on investing in large and mid-cap firms. It may also invest in foreign securities.
The fund has returned 6.92% year to date, outperforming S&P 500's year-to-date return of 5.04%.

Guinness Atkinson Alternative Energy (GAAEX) seeks capital growth over the long term. The fund invests heavily in domestic and foreign companies from the alternative energy sector. The fund invests in companies regardless of their market capitalization and may also invest in developing economies.

The fund has returned 6.02% year to date, outperforming S&P 500's year-to-date return of 5.04%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank.

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
Referenced Stocks: XLK , SMPSX , PRHSX , GAAEX

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