September has long been a bearish month on Wall Street, and this year, ETFs could be where pressure first materializes.
In the past, the S&P 500 fell more than half the time in September, down an average of more than 1.2%, Bank of America said. This time, the risk levels are higher: stocks in the index have risen 17% since May, valuations are close to dot-com bubble levels, and hedge funds and quant strategies alike are running with high exposure, Bloomberg said. Mix in a Federal Reserve policy announcement, inflation readings, and the seasonal slowdown in corporate buybacks, and volatility might be poised to erupt.
For ETFs, that translates to risk and opportunity.
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The SPDR S&P 500 ETF Trust SPY, Wall Street’s S&P 500 proxy, has risen close to 10% since June, compared to broad bond ETFs that have either seen a dip or are largely flat. That outperformance against bonds can prompt pensions and mutual funds to sell stocks as they rebalance, contributing to selling pressure in September.
However, wide bond ETFs like the iShares Core U.S. Aggregate Bond ETF AGG and iShares 20+ Year Treasury Bond ETF TLT could experience inflows as investors chase ballast, particularly with equity positioning extended. Defensive strategies like the Invesco S&P 500 Low Volatility ETF SPLV and iShares MSCI USA Min Vol Factor ETF USMV might also gain cash if traders search for shelter in utilities, staples, and dividend-paying names.
In contrast, increasing hedging activity implies that volatility-linked ETFs may become the focus. Products based on the Cboe Volatility Index, i.e., the ProShares VIX Short-Term Futures ETF VIXY or ProShares Ultra VIX Short-Term Futures ETF UVXY, tend to attract interest during cyclical drawdowns. More tactical investors, however, can use inverse ETFs like the ProShares Short S&P 500 SH or the ProShares UltraShort S&P 500 SDS as means to profit from (or hedge against) a decline without selling stock positions.
Citing Brandon Yarckin, COO of Universa Investments, Bloomberg reported that ETFs are the battlefield for September’s volatility, where investors will either double down on index trackers or rotate quickly into hedges and defensive tools.
With retail participation usually at its yearly trough in September and institutional rebalancing poised to intensify, ETFs will probably be at the forefront of the way investors tackle what’s shaping up to be the market’s most challenging month.
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