Can You Go On Holiday 10 Months A Year And Beat The Indexes?

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 |  Includes: EWA, EWG, EWH, EWJ, EWU
by: Fred Piard

In my previous article (read here), I claimed that the German stock market was one of the best seasonal play in November and December. But what about other countries?

The next table shows the returns (Ret. in %) and maximum drawdowns (DD. in %) of investing only two months a year between 1/1/2001 and 1/1/2013 in various stock markets using the iShares MSCI series. I have kept only ETFs that were available for trading during the whole period. These ETFs are not currency-hedged. The holdings of an MSCI index are different from the holdings of the country's reference index. The first column is the average return during the two months of November and December. The second column shows the maximum drawdown when investing only these two months every year, and staying in cash the rest of the time. The third and fourth column give the average annual returns and maximum drawdowns of holding the ETFs all the time. Dividends are included in all columns.

ETF Country Nov-Dec Ret. Nov-Dec DD. All-Year Ret. All-Year DD.
SPY USA 3.5 -23.8 2.8 -55.4
EWC Canada 4.4 -34.3 8.1 -61.1
EWU UK 3.2 -24.2 3.5 -64.1
EWG Germany 7.3 -21.8 4.1 -63.9
EWQ France 5.1 -20.6 1.8 -61.8
EWI Italy 5.1 -21.1 -1.2 -70.3
EWP Spain 5.8 -26.1 5.7 -63.3
EWO Austria 7.1 -31.2 9.9 -76.3
EWD Sweden 7.8 -30.0 7.0 -67.9
EWN Netherlands 5.4 -19.9 1.8 -65.4
EWL Switzerland 5.3 -28.0 5.3 -51.9
EWK Belgium 4.7 -25.1 4.1 -74.1
EWJ Japan 4.2 -16.3 0.0 -54.4
EWA Australia 4.3 -35.1 12.9 -65.6
EWY South Korea 8.2 -41.4 15.6 -72.1
EWT Taiwan 7.1 -34.0 4.3 -60.8
EWH Hong Kong 3.7 -23.6 7.3 -62.4
Click to enlarge

Some interesting observations may be drawn from these numbers:

- In 11 countries out of 17 (in bold), the two-month return is better than the all-year return. It means that the return was negative on average the 10 other months. Passive investors might have made a better return, with much lower drawdowns and volatility, being out of the market 10 months a year (the volatility is not in the table to make it easier to read). Remember that dividends are included in the calculation.

- The November-December return is less than 50% of the average annual return in only one country: Australia.

- Investing two months a year in the two worse stock markets of the period (Italy and Japan) would have given a better return and lesser drawdown than SPY.

- The best returns for this seasonal trade are in Sweden and South Korea. However, if we take into account the risk (drawdowns and volatilities), the best choice remains Germany.

Conclusion:

Last twelve years, these major stock markets got most of their returns in November and December, and often more than their total returns. However, I wouldn't enter a seasonal trade blindly without a hedge or a technical analysis confirmation. There are various ways to mix seasonality with momentum and market timing so as to improve the performance of an ETF tactical portfolio.

You may want to click here to read more about our methodology and portfolios.

Disclosure: I am long EWG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.