Best ETF Buys For "Sell In May And Go Away" Script

A generic image of many stacks of coins Credit: Shutterstock photo

May is a seasonally weak month for the stock market, hence the adage, "Sell in May and go away." We asked several asset managers to share their best ETF investing idea, assuming a sell-off sets in.

• Gary Gordon , president of Pacific Park Financial in Aliso Viejo, Calif., with $90 million in assets under management:

Based largely on excessive exuberance for central bank policy trumping the litany of bad news, I am firmly in the "go away" camp. I have been lightening up on risk assets throughout April.

A 5% pullback off of the highs is the least that investors should expect in U.S. stocks. ETF selection should be conservative and/or unique in nature. My selection is based largely on last year's pattern of holding up well during the 2012 May-June gloom "correction."

Big pharmaceuticals fit the bill then, and I expect a repeat in relative performance. I would run withPowerShares Dynamic Pharmaceuticals ( PJP ) with the caveat that I do not buy and hold and use trailing stop-limit orders.

There's not much economic cyclicality in pharmaceuticals. In 2012's May-June gloom when the S&P 500 shed 8.5%, PJP actually gained several percentage points. I wouldn't necessarily expect gains in a broader-based correction, but you would likely see relative outperformance.

• Neena Mishra , director of ETF research at Zacks Investment Research in Chicago:

With major indexes near record highs, it is quite possible that the market may take a breather for some time. Furthermore, some of the recent reports reveal that the economy slowed down in March after showing strong momentum in January and February. And the situation in the eurozone remains uncertain.

At the same time, massive easing by the Federal Reserve, which has been the main force behind the rally, is likely to continue for the time being. Further, stocks still look quite attractive in terms of valuation compared with some other asset class.

However, with so many uncertainties hovering over the market and significantly lower trading volumes during summer months, I think that market volatility will go up in the coming weeks.

PowerShares S&P 500 Low Volatility ( SPLV ) tracks the performance of 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. It has beaten the broader market year to date with a 15.21% return vs. 11.51% for SPDR S&P 500 ( SPY ). Its dividend yield is 2.64% currently, compared with 2.00% for SPY.

For longer-term performance, I looked at the historical data for the index that this ETF tracks. S&P Low Volatility index significantly outperformed the broader market with an annualized total return of 10.61% compared with 6.60% for the S&P 500 index, over the past five years.

Further, its volatility was much lower at 12.75% (annualized) vs. 18.99% for the S&P 500 index. However, low-volatility strategies underperform in very strong bull markets.

• Charles Freeman , portfolio manager at Holderness Investments in Greensboro, N.C., with $96 million in AUM:

If we get a sell-off this spring, one ETF we are bullish on isPowerShares DB U.S. Dollar Index Bullish ( UUP ). The U.S. will continue to be a safe haven in the world economy, and we have seen investors buy the U.S. dollar as a "risk off" trade when the equity market runs into trouble.

The dollar has also shown strength lately, given the very aggressive rhetoric and action of Shinzo Abe, prime minister of Japan, and the Bank of Japan. Their 2% target inflation goal has led to a sharp depreciation of the yen, and thus, appreciation of the dollar.

Europe is struggling with recession and fiscal troubles, and these issues have weighed on the euro. The market shrugged off news from Cyprus, but we feel there is still significant risk in Europe. If the world is in a "risk off" mood, headlines out of Europe could drive Europe and the euro lower. This will also support the dollar.

The Fed may possibly change its (quantitative easing) policy as early as the end of the year. Once the Fed eventually pulls back and the economy becomes more self-sustaining, we think this will further support the dollar's value. Historically, there has been a moderately positive correlation between the dollar and interest rates.

• Daniel Weiskopf , managing director at Forefront Global ETF Strategies in New York with $120 million AUM:

Generally, following strong fourth-quarter momentum, market fund flows generally are strongest in the first quarter due in part to 401 (k) investing, and then summertime blues come around and investors go on vacation.

Measuring how steep a pullback might be is challenging, especially since global central banks are now all providing so much economic stimulus. Clearly, part of the issue for selling in May is finding a compelling investment beyond just cash.

PowerShares Senior Loan Portfolio ( BKLN ) yields about 4.75%. I don't know when rates will go higher, but ultimately if central banks are successful, gross domestic product growth is going to strengthen and higher interest rates will follow. This asset class is also not highly correlated to equity markets.

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

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

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.