Don't Sell in May and Go Away: Follow These ETF Strategies

The U.S. stock market has entered a historically weak period due to seasonal trends. Going by the old popular adage “Sell in May and Go Away,” investors should sell their stocks in May and re-enter the market in November to capitalize on the historically strong performance of equities between November and April. It denotes traditional market underperformance during summer months (May to October).

Will the Old Saying Come True in 2025?

While the "Sell in May and Go Away" adage may have proved true historically, this year’s news-driven market volatility may defy the pattern. Let’s dive into the current market trends:

U.S. Stocks’ Performance

After a slump in early April, Wall Street staged a nice comeback driven by increasing hopes of a U.S. trade deal with major partners and solid corporate earnings from leading tech players. The S&P 500 logged its longest winning streak since 2004 to start May and erased all the losses incurred during the early April market downturn triggered by President Trump's "Liberation Day" tariff announcement. However, the rally seems to be fading as Trump has ramped up tariff bets again.

Trade Tariff Gyrations

Several reports suggest that the United States and China are willing to negotiate on tariffs and put an end to the trade conflict. Chinese officials have signaled reopening trade talks with Washington, while President Trump said on Sunday that he wants a "fair deal" with China. However, Trump reignited concerns over a global trade war by introducing new tariffs. He announced a 100% tariff on movies produced outside the United States. Trump also indicated that he has no plans to talk about trade with China's President Xi Jinping this week.

Further, Trump signaled late Monday that he planned to announce tariffs on pharmaceuticals over the next two weeks, aimed at reducing regulatory hurdles for pharmaceutical manufacturing in the United States.

Strong Tech Earnings

Strong quarterly earnings reports from software giant Microsoft (MSFT) and Facebook parent Meta Platforms (META) spread strong optimism in the tech sector. The dual earnings outperformance underscores that strong demand for AI is helping both companies navigate tariff-driven economic uncertainty (read: AI ETFs Set to Gain on Robust Meta, Microsoft Earnings). 

Amazon (AMZN) and Apple (AAPL) also came up with earnings and revenues beat. However, Apple warned of a $900 million tariff headwind in the ongoing quarter, while Amazon also issued a cautious outlook due to uncertain consumer demand in the face of shifting tariff policies.

Mixed Economic Indicators

The U.S. economy contracted in the first quarter for the first time in three years due to a monumental pre-tariff import surge. GDP declined at an annualized rate of 0.3% during the first three months, more than the 0.2% decline expected by economists surveyed by Bloomberg

U.S. manufacturing activity shrank the most since November in April, while consumer confidence hit a five-year low. The decline was due to tumbling consumers’ expectations related to business conditions, employment prospects and future income, reflecting pessimism about the economy (read: Is Weak Consumer Sentiment Hurting Discretionary ETFs?). 

Nevertheless, April jobs data show that the U.S. labor market remained resilient amid the tariff chaos. The economy added better-than-expected 177,000 jobs while the unemployment rate held steady at 4.2%, providing further assurance about the economy's health.

As such, investors might consider several investment strategies to navigate the May-October period more effectively, which could lead to a winning portfolio.

Sector Rotation

Rotating the investments into sectors that generally perform well during the May-October period, such as consumer staples, utilities, and healthcare, could be beneficial. Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF XLP, Utilities Select Sector SPDR ETF XLU and Vanguard Health Care ETF VHT intriguing. VHT has a Zacks ETF Rank #1 (Strong Buy), XLU has a Zacks ETF Rank #2 (Buy), while XLP has a Zacks ETF Rank #3 (Hold).

Dividend Investing

Focusing on dividend-paying stocks can provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. Zacks Rank #2 Schwab U.S. Dividend Equity ETF SCHD and WisdomTree US High Dividend Fund DHS fit well in this category.

Low-Volatility Focus

Investing in low-volatility stocks can help reduce the overall risk in the portfolio during the May-October period. Low-volatility stocks tend to exhibit smaller price fluctuations and have more stable returns compared to the broader market. ETFs like iShares Edge MSCI Min Vol USA ETF USMV and Invesco S&P 500 Low Volatility ETF SPLV that focus on low-volatility stocks can provide an easy way to implement this strategy. Both funds have a Zacks ETF Rank #2.

Value Addition

Value investing is an investment strategy that focuses on purchasing stocks that are undervalued relative to their intrinsic value. Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. Vanguard Value ETF VTV and iShares Russell 1000 Value ETF IWD, having a Zacks ETF Rank #1, could be excellent picks (read: Buy Top-Ranked Value ETFs for Outperformance).

Quality Bet

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. Among the most popular quality ETFs are iShares Edge MSCI USA Quality Factor ETF QUAL and Invesco S&P 500 Quality ETF SPHQ, having a Zacks ETF Rank #3 and 2, respectively.

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

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