ETF Strategies to Realize the Halloween Effect This Year

It may sound ironic, but the occasion of ghouls and ghosts can turn into an occasion of angels for Wall Street. Yes, it’s the Halloween Effect that normally lights up Wall Street. As you start carving the pumpkin, the gloom over Wall Street may pass away. Historically, investing in equities on All Hallow’s Eve — Oct. 31 – earns investors solid long-term returns. At least research shows that.

What is Halloween Effect?

Halloween Effect is a historically observed increase in stock prices from the month of November through the end of April. It is exactly opposite the popular adage "sell in May and then walk away,” which refers to the six months between May 1 and Oct. 31.

It is a seasonal anomaly, which is dissimilar to the buy-and-hold strategy, in which an investor has to go through down months. Vacations, the holiday buying season (both Christmas and spring) and seasonal optimism probably contribute to this optimism.

According to Forbes, a study conducted by Ben Jacobsen and Cherry Y. Zhang of Massey University in New Zealand shows that over a 300-year period, stocks habitually traded 4.52% better in the November through April period than in the summer months.

Over the past 50 years, the disparity in performance has been more glaring at 6.25%. This trend holds true in 35 countries. According to their analysis of 65 developed and emerging markets, average stock-market returns for the six months following Halloween have come at around 8.5% a year.

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.

Technology

Per Equity Clock, the tech sector enjoys seasonal strength in Q4. While the overall sector is basking in the glow of artificial intelligence (AI), some corners like cyber security, digital payments, networking, and software services may rally hard. Plus, the Fed has gone into the policy easing mode, which is another tailwind for the sector.

So, top-ranked funds like Invesco Dynamic Semiconductors ETF PSI, ProShares S&P Technology Dividend Aristocrats ETF TDV and SPDR S&P Software & Services ETF XSW may prosper in the near term (read: Bet Big on AI Software Stocks & ETFs for Long Term Opportunity).

Finance

In the third quarter of 2024, Wall Street's largest banks recorded a notable rebound, driven by increased corporate activity in debt issuance and mergers. Many of these banks reported strong trading performances, which helped offset uneven consumer banking results to some extent (read: Time for Big Bank ETFs on Upbeat Earnings?).

Collectively, Goldman Sachs GS, Bank of America BAC, Citigroup C and JPMorgan Chase JPM reported combined investment banking fees of $6.5 billion, a 27% increase year-over-year. Combined trading revenues for these banks reached $23.4 billion, up 6% from the previous year.

In the coming days, a steepening of the yield curve would favor the finance stocks more. US Financials iShares ETF IYF and U.S. Regional Banks iShares ETF IAT are some of the ETFs that should come under investors’ focus.

Small Caps

This is a tricky space. 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 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 (Buy).

Medical

The sector boasts a safe-haven status amid the market crisis. The tensions in the Middle East and global slowdown fears may cause global markets to be volatile. Hence, medical/healthcare investing makes sense against the current edgy market backdrop. Job growth in the sector remains decent. Health Care Select Sector SPDR ETF XLV has a Zacks Rank #1 (Strong Buy) and SPDR S&P Biotech ETF XBI has a Zacks Rank #2.

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