August is usually is not the best month of the year for U.S. stocks, but it was even worse than Wall Street would have hoped for this year.
By mid-July, the S&P 500 was up over 3% for the year.
But by the end of the last trading day of August, the index was saddled with a year-to-date loss of 4.2%, and that was after a two-day rally that included the best one-day performance for U.S. stocks in over four years. And in September, the broader market is already down more than 2%.
Meanwhile, the SPDR S&P 500 ETF (SPY), one of the S&P 500 tracking funds and the world’s largest ETF by assets, is trading well below its 50- and 200-day moving averages, and 6.5% below its all-time high touched in July.
Those anecdotes are not encouraging, but there is a silver lining.
August’s woes for U.S. stocks, and September’s track record for being the worst month for stocks, could prove to be a buying opportunity for savvy investors. With that in mind, let’s have a look at some bullied ETFs that now look at lot more attractive than they did five or six weeks ago.
Buy U.S. Stocks: Technology Select Sector SPDR ETF (XLK)
Expense Ratio: 0.15%
The Technology Select Sector SPDR ETF (XLK) and rival tech sector ETFs were not spared the market’s wrath in August.
By mid-August the largest tech ETF dipped as low as 16% below its all-time high, also set in August. With the benefit of a strong end to the week, XLK is now “just” 10% below its all-time high.
Like it or not, being bullish on broader U.S. indices and the relevant ETFs means being bullish on tech, for the simple reason that technology is 20% of the S&P 500’s weight, or 365 basis points more than the S&P devotes to financial services stocks, its second-largest sector weight.
That means it is unlikely that U.S. stocks can earnestly rebound without some contribution from tech. Could you imagine the likes of Apple (AAPL), Microsoft (MSFT) and Facebook (FB) warming the benches during a rally by the S&P 500?
XLK’s price-to-earnings ratio is 15.3, which is quite reasonable considering the massive cash hoards held by several of the ETF’s top 10 holdings, including Dow Jones components Apple, Microsoft and Cisco Systems (CSCO). XLK charges 0.15% per year, or $15 per $10,000 invested annually.
Buy U.S. Stocks: iShares Nasdaq Biotechnology ETF (IBB)
Expense Ratio: 0.48%
Talk about getting smacked around. When markets crumble, leadership groups that are perceived as overvalued can endure severe punishment, and that is exactly what has happened in recent weeks with the iShares Nasdaq Biotechnology ETF (IBB) and rival biotech funds.
Underscoring the volatility inherent in the biotech space and just how much IBB has been tarred and feathered, the largest biotech ETF was able to muster a gain of almost 4% last week, but is still down 12% over the past month, while residing nearly 19% below the all-time reached last month. Still, investors are sticking by IBB.
The IBB ETF is home to some $8.2 billion in assets under management, and there are some key points to remember with IBB and other biotech ETFs. First, specific to IBB, this ETF is a bet on the biggest biotech stocks. Second, health care is still the best-performing sector this year by a wide margin.
Third, the recent market pullback was not caused by the evaporation of the factors that have spurred healthcare stocks, including an aging population, robust industry consolidation and a spate of Food and Drug Administration approvals.
Finally, essentially every biotech dip over the past five years has proven to be a buying opportunity. IBB charges 0.48% per year, or $48 per $10,000 invested.
Buy U.S. Stocks: The Guggenheim S&P 500 Pure Growth ETF (RPG)
Expense Ratio: 0.35%
The first two ETFs highlighted here are obviously sector and industry plays, so we’re shifting things up a bit with a broader market selection, the Guggenheim S&P 500 Pure Growth ETF (RPG).
RPG makes the cut despite the recent market calamity because growth is topping value this year, as highlighted by RPG sporting a 5% positive difference in return over the S&P 500.
The Pure Growth ETF’s outperformance of the traditional cap-weighted S&P 500 ETFs is not new. Over the past three years, standard S&P 500 ETFs are up 35%, but RPG has climbed nearly 62% over the same span.
If RPG maintains its year-to-date advantage over SPY and friends, it will be the fifth time in seven years the growth fund has outperformed standard S&P 500 funds.
Remember what we said SPY needing help from tech to move higher? That is even more true with RPG, as the ETF allocates 26% of its weight to that sector. With another 25% going to consumer discretionary stocks, RPG is also a play on a potential rebound in consumer cyclicals. The ETF charges 0.35% per year, or $35 per $10,000 invested.
As of this writing, Todd Schriber did not hold a position in any of the aforementioned securities.
