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Not Santa, Trade Will Rule This December: ETFs to Your Rescue

Sanghamitra Saha

A consensus carried out from 1950 through 2018 has revealed that December offered positive returns in 51 years and negative returns in 18 years, the average return being 1.35%, the second best seen in a year, as per moneychimp.com. It is believed a Santa Clause rally normally drives markets, at this time of the year.

What is the Santa Rally?

According to Stock Trader’s Almanac, the Santa rally is “a short, sweet, respectable rally within the last five days of the year and the first two in January.” There has been an average of 1.3% gain since 1950, and it has offered positive returns about 75% of the time since 1969, per a source.

After December 2018 Being a Massive Downer, Will 2019 Paint a Similar Picture?

Global growth slowdown fears, thanks to the prevalent trade tensions, mainly hit the broader market hard in 2018, with the SPDR S&P 500 ETF SPY losing 9%, SPDR Dow Jones Industrial Average ETF DIA shedding 8.9% and Invesco QQQ Trust (QQQ) retreating about 8.8%. The market suffered its most awful December since the Great Depression in the year. The picture looks no different this year. Wall Street had a rocky start to December. Already the QQQ has lost 1.8%, the SPY retreated 1.5% and DIA is off 1.9%, so far this month.

Wall Street has rallied in the last two months in hopes of a Phase One U.S.-China trade deal. Now, President Trump’s comment “that he could wait until after the 2020 election for a trade deal with China” has sent a shockwave in the markets. Possibilities of China intensifying its retaliation over a supportive U.S. bill toward pro-democracy Hong Kong protestors have also flared up geopolitical tensions. (read: Wall Street Loses Maximum Since October: Inverse ETFs to Play).

On top of it, the ISM manufacturing data and U.S. construction spending came in worse than expected. Investors’ eyes will be all set on Dec 15 — the date for another round of tariffs on Chinese goods slated to be placed. The date can make or break the Santa rally this year.

Given this scenario, it is less likely that even Santa can provide enough support to Wall Street this time around. Nonetheless, a spike in Christmas shopping can definitely do wonders for the markets. Still, this kind of uncertain market sentiment might make this Christmas a little dull, curbing the usual momentum of the end-of-season ascent.

And we are highlighting some ETF bets that could go a long way in investors’ rescue.

VanEck Vectors Biotech ETF (BBH)

The Santa rally for the biotech space started long before December, thanks to loads of mergers and acquisitions, positive drug data and FDA approvals. Trade tensions appear weak to hurt the space. The fund added 0.2% on Dec 3 and currently carries a Zacks Rank #2 (Buy).

Invesco S&P 500 Enhanced Value ETF SPVU

In uncertain times, value stocks appear as safer bets. Also, per Bank of America, “Value has never been this cheap vs. Momentum.” So, investors can bet on the Zacks Rank #2 ETF SPVU. The fund offers low P/E ratios amid the broader value ETF space (read: These ETFs Offer a Really Good Deal on Black Friday).

Communication Services Select Sector SPDR Fund XLC

This Zacks Rank #2 fund looks to be a power-packed pick amid holiday season. It is loaded with Frozen-2 famous Walt Disney, video-game maker Activision Blizzard, social media giant Facebook and search engine like Alphabet. Also, the fund has focus on telecom giants like Verizon and AT&T. Telecom companies have higher domestic exposure (thus less trade-sensitive) and good dividend payout history. The latest Verizon-Amazon deal further adds to the glory.

VanEck Vectors Retail ETF RTH

Walmart WMT, Target TGT, Best Buy BBY and Amazon AMZN made the most of the Black Friday and Cyber Monday shopping spree, and are likely to continue the momentum throughout the holiday season. These four companies take about 34.8% of the fund RTH and thus, come across as a good pick. The fund carries a Zacks Rank #3 (Hold), currently.

SPDR S&P Aerospace & Defense ETF XAR

In any case, it is a safe pick. Like many analysts, we also believe the fund is “tariff-resistant.” This is especially true given the fund has only 3.7% exposure to China-dependent Boeing. The fund carries a Zacks Rank #2, at present.

iShares U.S. Home Construction ETF (ITB)

U.S. homebuilding bounced back in October and permits for future home construction soared to a more than 12-year high. Also, low mortgage rates would bode well for this space. The sector has a low correlation to trade war also. ITB has traded positive 70% times in December in the last decade. The fund currently carries a Zacks Rank of 3.

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Click to get this free report Amazon.com, Inc. (AMZN) : Free Stock Analysis Report SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports SPDR S&P Aerospace & Defense ETF (XAR): ETF Research Reports VanEck Vectors Retail ETF (RTH): ETF Research Reports VanEck Vectors Biotech ETF (BBH): ETF Research Reports iShares U.S. Home Construction ETF (ITB): ETF Research Reports Invesco QQQ (QQQ): ETF Research Reports SPDR S&P 500 ETF (SPY): ETF Research Reports Best Buy Co., Inc. (BBY) : Free Stock Analysis Report Walmart Inc. (WMT) : Free Stock Analysis Report Target Corporation (TGT) : Free Stock Analysis Report Invesco S&P 500 Enhanced Value ETF (SPVU): ETF Research Reports Communication Services Select Sector SPDR Fund (XLC): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report