Clark: Play Defense With Dividend Fund HDV

May 13, 2014

If you choose not to ‘sell in May and go away,’ it makes sense to get a bit defensive.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features K. Sean Clark, CFA, chief investment officer of Philadelphia-based Clark Capital Management.

The U.S. markets have gone through a sharp rotational correction over the past two months. Growth, small-cap and high-beta stocks have all collapsed relative to defensive investments.

The rotation raises the question, Have we have seen the best the market has to offer this year, or will the rotation to defensive utilities, staples and late-cycle basic material and energy names provide new leadership for another charge higher?

We made the case in our column in January 2014 that the middle of this year would be wrought with challenges given historical midterm election-year trends and the new head at the Federal Reserve.

So, are we at that point now, and is it time to start positioning a bit defensively with, say, a bit of the iShares High Dividend ETF (HDV | A-70)? Perhaps, but first a bit of background.

To begin, we’ve also all heard the saying: “Sell in May and go away.” That suggests investors would do well to be out of the market from May 1 through Oct. 31. Is that just stock-market lore, or is there really something to it that investors need to pay attention to?

According to Ned Davis Research, since 1950, all of the market’s gains have come from Oct. 31 through April 30. So, let’s break out the two six-month seasonal time periods since 1950: Nov. 1 – April 30; and May 1 – Oct. 31. We’ll look at the growth of $10,000 in each period.

For example, $10,000 invested in the S&P 500 in 1950 has grown to $606,167 during the strongest six-month seasonal period, while $10,000 invested in the weak six-month seasonal period has declined to $6,920.

To be clear, I think it’s quite silly to base one’s investment decisions purely on what month we’re in, but it’s hard to argue with the statistics. There’s also the problem that once an accepted Wall Street adage—such as “Sell in May and go away”—becomes widely publicized in the press, it often doesn’t prove true.

Last year was a prime example, with many analysts proclaiming a need to get defensive because of the calendar. However, instead of declining during the “normal” seasonally weak period, the S&P 500 Index rose 11.1 percent from April through October.


Midterm Elections

If we break out the study a little further, it becomes clear that all of the weakness experienced with this stock market lore has occurred in midterm election years. Since 1950, the midterm election year is the only year to have had an average decline in the May 1 to Oct. 31 period—an average of 0.37 percent, to be exact. The other three years in the cycle averaged gains of 1.82 percent during the May 1 through Oct. 31 period.

The chart below illustrates that the pattern of returns in the midterm election years (shown in blue) is dramatically different from other years (shown in black).


And that raises the question, Should investors heed the warning about potential risks as we move well into the second quarter? History suggests yes.

In addition, the rotational correction we’ve witnessed also hints at a market that’s getting more defensive. For investors who want to stay invested, potential risks notwithstanding, we would heed the market’s recent shift to defensive allocations and look toward higher dividend plays.

One such play in an exchange-traded wrapper, as I noted passingly above, is HDV, which has a 12-month dividend yield of 3.11 percent and a one-year beta against the S&P 500 Index of 0.76. The sector exposure is dominated by consumer staples, health care and utilities, which are typically defensive in nature.

After all, let’s remember that even in a declining market, there are opportunities somewhere—or at least areas that can offset losses occurring in the broader market.

In the end, “Sell in May and go away” might have some truth in it.

However, by digging a little deeper into market and economic history, we can uncover more specific triggers for market declines over the summer months and make more educated investment decisions.

Clark Capital Management Group is an independent investment advisory firm providing institutional-quality investment solutions to individual investors, corporations, foundations and retirement plans. Clark Capital was founded in 1986 and has been entrusted with approximately $3 billion in assets. For more information about Clark, contact Advisor Support at 800-766-2264 or [email protected]Please click here for a complete list of relevant disclosures and definitions.


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