The first quarter is over — suffice to say, the first three months of 2016 brought investors more action than they were hoping for. Even with all that action, major U.S. equity indexes posted only modest gains, though that is impressive considering the broader market’s dreadful showing in January.
With the second quarter here, investors have the opportunity to hit the reset button by starting new positions and parting ways with losers. Of course, some investors are likely to be pensive heading into the April through June quarter. First-quarter volatility combined with some unfavorable seasonal trends in the second quarter have a way of doing that.
Speaking of that allegedly unfavorable seasonality, the second quarter’s poor reputation is somewhat overstated. Investors hear plenty about “sell in May and go away,” but over the past two decades, the S&P 500 has averaged a small gain in May. Before getting to May, it is worth noting that April ties with October as the best month for the S&P 500 with an average gain of 2.1% over the past 20 years.
Investors have many options for enduring and thriving during the second quarter. Part of that includes using some of the best ETFs on a tactical basis as second-quarter “rentals.” Another element to that strategy is using of some of the best ETFs as “all weather” plays to mitigate any increases in volatility.
Without further ado, let’s have a look at some of the best ETFs for surviving the second quarter.
Best ETFs for Q2: PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
Expense Ratio: 0.3% a year, or $30 per $10,000 invested
If you’re a fan of low-volatility ETFs, there is a good chance you’ve heard about the PowerShares S&P 500 Low Volatility Portfolio (SPLV). Well, SPLV has a dividend counterpart in the form of the PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD).
What makes SPHD one of the best ETFs, particularly for conservative investors, regardless of the time of year, is that it takes the volatility avoidance methodology made popular by SPLV and combines it with a dividend component. While SPLV holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility, SPHD holds the 50 S&P 500 stocks with the lowest trailing 12-month volatility and the highest trailing one-year dividend yields.
What makes High Dividend one of the best ETFs, particularly for conservative investors, regardless of the time of year, is that it takes the volatility avoidance methodology made popular by S&P Low Volatility and combines it with a dividend component. While SPLV holds the 100 S&P 500 stocks with the lowest trailing 12-month volatility, SPHD holds the 50 S&P 500 stocks with the lowest trailing 12-month volatility AND the highest trailing one-year dividend yields.
SPHD is also one of the best ETFs for the here and now because it is the type of ETF that thrives when interest rates are low. With the Federal Reserve appearing increasingly unable to raise interest rates more than twice this year, ETFs with large allocations to rate-sensitive real estate and utilities stocks should continue outperforming.
Bolstering its best ETF status, SPHD allocates over 19% of its weight to utilities stocks and nearly 21% to financial services names. The bulk of SPHD’s financial holdings are real estate and rate-sensitive insurance stocks.
SPHD has a trailing 12-month yield of nearly 3.3%.
Best ETFs for Q2: Energy Select Sector SPDR (ETF) (XLE)
Expense Ratio: 0.14%, or $14 annually for every $10,000 invested
The appearance of Energy Select Sector SPDR (ETF) (XLE) on a best ETFs list could come as a surprise to some, particularly with the ETF up just over 5% in just the past month, but hear the following out. This is a tactical trade to take advantage of some of the second quarter’s more positive seasonality.
While seasonal trends do not come with guarantees of repeating, it is worth noting that since the XLE experienced its full year of trading in 1999, it has historically been the second-best performer in that group in April and May, averaging positive returns in both months.
But, before jumping into XLE, investors should know what they’re getting into and what could make this one of the best ETFs going forward. Dow Jones Industrial Average members Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) combine for almost 34% of XLE’s weight. So if the two largest oil companies go down, so does XLE.
Best ETFs for Q2: Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE)
One of the most prominent themes of the first quarter was the resurgence of emerging markets equities and the corresponding ETFs. For example, the widely followed iShares MSCI Emerging Markets ETF (EEM) finished the quarter higher by more than 6%, and investors did much better than that with a number of diversified and single-country ETFs tracking developing economies.
In fact, plenty of emerging markets funds merit “best ETFs” consideration now that the first quarter is behind us, including the Schwab Fundamental Emerging Markets Large Company Index ETF (FNDE). The oft-overlooked FNDE climbed roughly 13% in the first quarter.
However, that should not imply this ETF’s run is over. With emerging markets equities still well off previous highs and the Fed appearing dovish, developing world stocks could have plenty of room to run in the second quarter and the rest of 2016. Obviously, that would be good news for FNDE, an ETF that takes a different approach to this asset class.
FNDE follows the Russell Fundamental Emerging Markets large Company Index, a benchmark that uses metrics such as sales, cash flow, dividends and buybacks to select the 300-plus companies found in this best ETF.
Low-beta South Korea and China combine for 36% of FNDE’s weight and the ETF is overweight Russian stocks relative to the EEM with a weight of more than 13% to that country. Combine the Russia allocation with a combined 18% weight to Brazil and South Africa and it becomes clear FNDE can retain its best ETF status if commodities prices continue rebounding.
Schwab clients can trade the ETF free of commission on the company’s platform.
Todd Shriber owns shares of SPHD with no plans to sell.