5 ETF Strategies to Survive a Historically Weak September

Wall Street slumped at the start of September as weak data raised fresh concerns about the health of the economy. All the three major U.S. indices recorded their biggest daily percentage declines since early August. The weak trend is likely to continue given that September is one of the market's historically worst months.

What History Says?

September is the only calendar month to average a negative return over the past 98 years, per Fisher Investments. According to Ryan Detrick, chief market strategist at advisory firm Carson Group, September has been the market’s worst-performing month since 1950. 

The declines are due to a seasonal phenomenon, as investors are more prone to selling than buying when they return from their summer vacations. Also, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges.

However, historically, presidential elections have not made September worse for stocks, per Detrick. Stocks have advanced in nearly a third (62.5%) of September heading into a presidential election (15 of the 24 elections since 1925). This is substantially better than its overall average. The median return in presidential election years is 0.3%.

According to SoFi's Liz Young Thomas, September is a challenging month for stocks in a non-election year. But when voters head to the polls, seasonal volatility can extend as far as mid-October.

Pain or Gain?

Two market-moving events will drive the movement of the stocks this month - the Fed meeting and developments related to the election. 

Federal Reserve Chair Jerome Powell signaled that interest rate cuts are coming in September, citing easing inflation and a weakening job market. At the latest Jackson Hole symposium, Powell said “the time has come” to lower borrowing costs in the light of a diminishing upside risk to inflation and moderating labor demand. Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market (read: 5 Best-Performing Sector ETFs in Volatile August).

Meanwhile, the latest economic data showed that U.S. manufacturing dropped again in August, pointing to a slowdown in the economy. 

U.S. stocks are likely to face a possible double-digit drawback in the next eight weeks as a slew of market-moving events temporarily challenge this year's gains, Fundstrat's Tom Lee told CNBC. The equity-market rally may get stalled near record highs even if the Fed starts a highly anticipated rate-cutting cycle. JPMorgan Chase & Co. strategists said, “political and geopolitical uncertainty is elevated, and seasonals are more challenging again in September.”

Against such a backdrop, investors seeking to remain invested in the equity world should consider some strategies to overcome the weak trends. For them, we have highlighted five strategies.

Focus on Low Volatility

Low-volatility ETFs have the potential to outpace the broader market in bearish conditions or in an uncertain environment while providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. ETFs like iShares Edge MSCI Min Vol USA ETF USMV and Invesco S&P 500 Low Volatility ETF SPLV could be compelling choices. These have a Zacks ETF Rank #3 (Hold).

Bet on Quality

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 are iShares Edge MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and Barron's 400 ETF BFOR. QUAL has a Zacks ETF Rank #2 (Buy) and SPHQ has a Zacks ETF Rank #3 (read: 5 Quality ETFs to Bet on Amid Volatile Markets).

Pick Low-Beta ETFs

Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of a stock or fund is less volatile than the market. 

That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market crumbles. Core Alternative ETF CCOR, with a beta of 0.09, and Innovator Defined Wealth Shield ETF BALT, with a beta of 0.10, could be compelling picks.

Add Value

Value stocks have proven to be outperformers over the long term and are less susceptible to market movements. These stocks have strong fundamentals — earnings, dividends, book value and cash flow —and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts. 

Some of the Zacks ETF Rank #1 (Strong Buy) ETFs are Vanguard Value ETF VTV, iShares Russell 1000 Value ETF IWD and iShares S&P 500 Value ETF IVE.

Emphasis on Dividends

Focusing on ETFs with 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 (read: Why You Should Buy Dividend ETFs Now).

In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF VIG and iShares Core Dividend Growth ETF DGRO, having a Zacks ETF Rank #1 or #2, fit well in this category.

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