Can ETFs Enjoy Halloween Effect Despite Rising COVID-19 Fear?

The Halloween effect is basically the historically observed rally in stock prices starting November through the end of April. This is closely linked to the "sell in May and go away" strategy, which advises investors to divest stock holdings in May and wait to reinvest until the end of October. The Halloween effect is dissimilar to the buy-and-hold strategy, in which an investor has to go through down months.

Historically, stocks trade better in November to April than in the summer months. This trend holds true in 35 countries. Holiday season buying and seasonal optimism may play a huge role in this surge. Some analysts even believe that a harsh winter keeps people inside, with more time to analyze stock trends.

However, things are not as predictable now as they used to be. SPDR S&P 500 ETF SPY lost about 3.2% in this timeframe last time, thus contradicting the trend altogether. This time, things are more bit tricky given the rising coronavirus cases and election uncertainty.

Against this backdrop, let’s take a look at a few ETF areas which might enjoy the Halloween Effect this time around.

Technology

Per Equity Clock, the tech sector enjoys seasonal strength in Q4. While the overall sector is well poisoned at the moment, some corners like cloud computing, semiconductors, software services and cyber security are poised for a rally due to renewed coronavirus-led restriction threats.

So, funds like WisdomTree Cloud Computing Fund WCLD, Invesco Dynamic Semiconductors ETF (PSI), Invesco DWA Technology Momentum ETF (PTF) and SPDR S&P Software & Services ETF XSW should prosper in the near term (read: Should You Buy Apple ETFs Ahead of the Holiday Season?).

Small-Caps

This is a tricky space. Cheaper valuations, seasonality and likelihood of stimulus checks post-election may favor the small-cap segment this year. Both Trump and Biden’s election agendas are in favor of small-caps.

Trump’s “America First” slogan is known to everyone. He intends to bring back foreign jobs to America, which in turn boosted small-cap U.S. stocks. This is because small-cap stocks have more domestic exposure and are unraveled by volatilities in foreign markets. On the other hand, Biden is also backing the $700-billion-plus “Buy American” agenda (read: Trump or Biden, Small-Cap Stocks & ETFs to Gain).

The Halloween Effect on Russell 2000 was a gain of 494% versus 373% offered by the S&P 500 from February 1993 through 2010-end. Plus, small-cap securities have historically proven their outperformance in January. These factors put focus on the small-cap ETF IWM.

Consumer Discretionary

Now who can overlook consumer discretionary ETFs at this point of the year, especially with events like Thanksgiving, Black Friday and Cyber Monday lined up?

National Retail Federation estimate Americans to spend a staggering $8.05 billion on Halloween, despite COVID fear. Average spending per person is expected to hit a record high of $92.12 (considerably up from $86.27 in 2019).

And “conventional wisdom is that strong Halloween spending is an indicator of strong Christmas season spending” per an analyst. Our pick for the busy holiday season is Amplify Online Retail ETF IBUY.

Industrials

Industrials stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund XLI has outperformed the S&P 500 in the past three months. Both Biden and Trump’s policies appear beneficial for industrial stocks and ETFs.

Joe Biden proposed a $1.3 trillion infrastructure overhaul last year. The Democratic presidential candidate’s campaign eyes investing in restoring highways, roads and bridges, while trying to boost adoption of electric vehicles and trains.

Meanwhile, the Trump administration is reportedly weighing nearly $1 trillion infrastructure plan as part of its efforts to bolster the American economy. A preliminary version being prepared by the Department of Transportation would take care of most of the funding for projects such as roads and bridges, and would also keep money for 5G wireless infrastructure and rural broadband. Hence, along with the likes of XLI, infrastructure fund IFRA should gain ahead."> should gain ahead.

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Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
 
SPDR SP 500 ETF (SPY): ETF Research Reports
 
iShares Russell 2000 ETF (IWM): ETF Research Reports
 
Amplify Online Retail ETF (IBUY): ETF Research Reports
 
SPDR SP Software Services ETF (XSW): ETF Research Reports
 
iShares U.S. Infrastructure ETF (IFRA): ETF Research Reports
 
WisdomTree Cloud Computing ETF (WCLD): ETF Research Reports
 
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