This article was originally published on ETFTrends.com.
As summer hits a midpoint heading into August, it's important for investors to know the historical significance that the month brings, particularly when it comes to the S&P 500. As such, it's important to watch ETFs that track the index, such as the SPDR S&P 500 ETF (SPY) , iShares Core S&P 500 ETF (IVV) and Vanguard S&P 500 ETF (VOO) .
Sam Stovall, Chief Investment Strategist at CFRA Research, warns investors that August is a time to keep the S&P 500 under their investment radars with respect to volatility. A deep rise or deep decline could be in store, but should not necessarily deter investors from heavy market oscillations.
"Since WWII, the S&P 500 gained about 1%, on average, in July of midterm election years, but then stumbled in August, ranking it among the three worst months," said Stovall. "The deepest August slump was in 1998, when the S&P 500 tumbled 14.6% in response to the losses endured by the hedge fund Long Term Capital Management. August also witnessed the second-highest rise of any month at 11.6%, in 1982, as the market began its 1982-87 bull run. Today, history says that investors should prepare for, but not necessarily run from, an increase in volatility."
Looking at the year-to-date chart, the S&P 500 peaked at 2,872.87 on January 26 before taking a dive to 2,581 on February 8. Since then, it has slogged its way back to 2,846.07 on July 25 and will be re-testing its January 26 ceiling, which August could reveal.
In terms of how investors can approach the month of August, Stovall recommends using momentum indicators to gauge the strength of the S&P 500. The past week saw earnings report like Facebook deal blows to the S&P 500, but Stovall says a mix of top 10 S&P 500 stocks in a portfolio could help make volatility work for investors.
"Despite an end-of-month social media meltdown, investors may still be willing to stick with a momentum strategy," said Stovall. "A hypothetical portfolio of an equal weighting to each of the top 10 S&P 500 sub-industries based on trailing 52-week price returns, rebalanced monthly, has outpaced the “500” on a MYD and YTD basis. In addition, the portfolio gained 13.6% per year vs. 8.1% for the S&P 500 and beat the broader market in 71% of all calendar years since 1991."
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Stovall recommends investors research sub-industries with the highest 12-month trailing returns to extract maximum benefit in what could be a volatile August.
"The S&P 500 sub-industries with the highest 12-month trailing return include: Application Software, Department Stores, Diversified Support Services, Electronic Equipment & Instruments, Health Care Facilities, Human Resource & Employment Services, Internet & Direct Marketing Retail, Oil & Gas Refining & Marketing, Railroads and Trading Companies & Distributors," said Stovall.
Tracking SPY, IVV and VOO will provide investors with the more broad-based exposure to the index itself--SPY is up 2.52% YTD, IVV is up 2.51% YTD and VOO is up 2.65% YTD based on Yahoo! Finance performance numbers.
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