ETF Strategies For December

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Includes: BITE, CVOL, DON, FDIS, HYHG, IGHG, JKI, KRE, RALS, RTH, SMLV, USO, VIXY, VOE, XLE
by: Zacks Funds

After a lustrous patch post election, the broader market scrummed to a slowdown to start December. Historically, December is the best month for stocks as the S&P 500 has offered 1.54% on average with 49 years being in the green since 1950, as per moneychimp.com.

Traditional investors may pin their hopes on the Santa Clause rally, but they should note that this time Christmas might be a little dull, defying the natural progression of the end-of-season rally. Profit booking at the pinnacle of the Trump rally seen in November and faster Fed hike expectations may cause stillness in the market.

This month, the Fed is expected to come up with the sole rate hike of the year. Though investors seem to have digested the move by now, a certain selloff is inevitable post hike. This is especially true given the benchmark U.S. Treasury yield hit a new 17-month high at 2.45% on December 1. The day saw an 8 bps jump in benchmark yield which was the highest single-day gain since November 2014.

Given this, investors must be interested in finding out all possible strategies to win over the unseen. For them, below we have highlighted a few investing tricks.

Tap Regional Banks

No matter how lofty levels financial stocks touched in November, these are going to keep rising in December if rates crawl up. With the U.S. economy growing at an annual clip of 3.2% in Q3 and inflation expectations gaining traction, long-term rates have higher chances of advancement. In this regard, we first choose regional bank ETFs like the SPDR S&P Regional Banking ETF (NYSEARCA:KRE).

And last but not the least in queue are volatility ETFs themselves such as the C-Tracks ETN on CVOL (NYSEARCA:CVOL) and the ProShares VIX Short-Term Futures ETF (NYSEARCA:VIXY). Notably, as the name suggests, volatility products are quite erratic in nature and thus suit investors with a short-term notion.

Investment Grade Corporate Bonds: Safety + Yield

Investors can also consider long-term corporate bond ETFs. With treasuries expected to be out of favor on the Fed rate hike bets, higher-yielding instruments like investment-grade corporate bond ETFs may come to the rescue of investors, especially those who are looking for current income. The ProShares Investment Grade-Interest Rate Hedged ETF (BATS:IGHG) can be a good pick now.

Bet on Holiday Season Too

Since December is all about Christmas, consumer discretionary activities should be on a roll. The National Retail Federation expects total holiday sales excluding autos, gas and restaurant to expand 3.6% to $655.8 billion, a little higher than the post-recession average of 3.4% since 2009. Also, the International Council of Shopping Centers sees a 3.3% uptick in spending at physical stores against 2.2% gains in sales last year (read: 4 ETFs & Stocks to Treat You on Halloween and After).

So, it is wise to look at top-ranked consumer discretionary ETFs like the Fidelity MSCI Consumer Discretionary ETF (NYSEARCA:FDIS), the VanEck Vectors Retail ETF (NYSEARCA:RTH) and the Restaurant ETF (NASDAQ:BITE) (read: BITE vs MENU : Will the War Whet Investors' Appetite?).

Play Mid-Cap Value U.S. Stocks?

With the prospect of a stronger greenback, large caps are likely to underperform in December as these have greater foreign exposure while small-caps appear to be a little overvalued after a stellar run in November. It is better to bet on mid-cap value stocks as these offer the best of both worlds and safety against volatility too. Investors can bet on top-ranked ETFs like the iShares Morningstar Mid-Cap Value ETF (NYSEARCA:JKI), the WisdomTree MidCap Dividend ETF (NYSEARCA:DON) and the Vanguard Mid-Cap Value ETF (NYSEARCA:VOE) for future gains.

Play Rebound in Oil; but Tread Cautiously

Oil prices have seen a lot in the last two and a half years. Now that things are turning in favor of oil with OPEC signing the output cut deal, at least for the near term, a play on oil is warranted via oil and energy ETFs like the United States Oil ETF (NYSEARCA:USO) and the Energy Select Sector SPDR ETF (NYSEARCA:XLE).

With oil on the mend and the Fed in the mood to tighten policy, investors can also bet on high-yield bond ETFs like the ProShares High Yield-Interest Rate Hedged ETF (BATS:HYHG). This is because U.S. energy companies are closely tied to the high-yield bond market, with the former comprising a considerable amount of junk bond issuance.

Volatility to Stay Awake: Play Risk Aware

Volatility is expected to lift its head in December on rising rate concerns and an expected lull in the market right after an eventful November. Investors can deal with this in various ways. While low volatility ETFs like the SPDR Russell 2000 Low Volatility ETF (NYSEARCA:SMLV) can be an option, defensive ETFs like the ProShares RAFI Long/Short ETF (NYSEARCA:RALS) can be tapped too.

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