Want to Ride the Halloween Effect: ETF Strategies to Follow

Halloween may be all about ghosts and goblins, but for Wall Street, the event often offers gifts and nice gestures. Thanks to the so-called Halloween Effect, stocks tend to brighten up with the lighting of the Jack-o’-lantern. Historically, investing in equities on All Hallow’s Eve — Oct. 31 – has earned investors solid long-term returns. At least research shows that.

What Is the Halloween Effect?

Halloween Effect is a historically observed increase in stock prices from the month of November through the end of April. It is the exact opposite of the popular adage "sell in May and then walk away,” which refers to the six months between May 1 and Oct. 31, as mentioned in Investopedia. Vacations, the holiday buying season (both Christmas and spring) and seasonal optimism probably contribute to this trend.

Historical data from Yardeni Research shows monthly S&P 500 performance from 1928 through September 2023. The combined return from November through April comes to about 5.3%, while the six months starting in May deliver a much slimmer return of just 2.4%, per a Bankrate article, as quoted in Yahoo Finance. The pattern emphasizes the importance of the Halloween Effect.

ETF Strategies to Follow

Against this backdrop, let’s take a look at a few exchange-traded fund (ETF) areas that might enjoy the Halloween Effect this time around.

Finance

Interest rates are on the decline, U.S.-China trade tensions are showing signs of easing and markets should gain momentum on decent corporate earnings. The economic signal from the largest U.S. bank results remains positive despite concerns over non-bank lenders, especially after a few recent bankruptcies.

Steepening yield curve – a plus for banking stocks – is likely ahead, while the financial sector currently boasts cheaper valuation. All these factors should boost ETFs like U.S. Financial Services ETF IYG, iShares U.S. Financials ETF IYF, and Invesco KBW Bank ETF KBWB.

Medical

The sector boasts a safe-haven status. Trade-tension-related global slowdown fears may cause global markets to be volatile, even if the peak of the tension is less likely to return in the near term. Hence, medical/healthcare investing makes sense against the current edgy market backdrop.

Job growth in the sector remains decent. The easing Fed policy is good for high-growth biotech stocks. The sector boasts a good Zacks Sector Rank #4 (at the time of writing).  Health Care Select Sector SPDR ETF (XLV) and SPDR S&P Biotech ETF (XBI) can be tapped in the above-mentioned context.

Semiconductors

Chip stocks are the backbone of the AI boom because advanced semiconductors control everything from training massive language models to running AI on devices. Demand for high-performance computing and data center capacity continues to surge as AI adoption spreads across industries.

With supply still tight and innovation gaining momentum, chipmakers are currently in a sweet spot. VanEck Semiconductor ETF SMH and First Trust NASDAQ Semiconductor ETF FTXL have a Zacks Rank #1 (Strong Buy) and #2 (Buy), respectively.

Small Caps

This is a tricky space. Small-cap stocks are currently in high momentum. Easing Fed policy and decent U.S. economic growth have been favoring the space. Plus, small-cap securities have historically shown their outperformance in January.

 These factors put the focus on the small-cap ETF SPDR Portfolio S&P 600 Small Cap ETF SPSM and Vanguard S&P SmallCap 600 ETF VIOO. These ETFs have a Zacks Rank #2 (read: Russell 2000 Beats S&P 500 Over Past 6 Months: ETFs in Focus).

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This article originally published on Zacks Investment Research (zacks.com).

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