Summer 2025: The Season of Ultra-Short-Term Bond ETFs?

Memorial Day weekend is here, which means more than backyard barbecues and beach trips. It’s also the unofficial start of the summer trading season on Wall Street. 

For decades, this time of year has been tied to the old adage, “Sell in May and go away,” which is a reference to the tendency for stock market gains to cool during the summer months. That seasonality has often been linked to lower trading volumes as institutional investors and money managers take vacations, which can open the door for increased volatility. 

While selling in May hasn't worked consistently in recent years, 2025 may prove to be different. With warning lights flashing across markets, this summer could play out in a unique way.

Is 'Sell in May' Due for a Comeback?

In recent years, the "Sell in May" mantra hasn’t really held up. Markets have often pushed higher during the summer despite the historical trend. But this year, things are looking a little less sunny.

As summer kicks off, long-term Treasury yields are sitting at multi-year highs, sending a clear warning from the bond market. Investors are increasingly concerned about fiscal irresponsibility in Washington, D.C., as the national debt soars and the recent Moody’s downgrade adds weight to those worries. 

Higher yields are making borrowing more expensive and could eventually choke off growth—particularly as signs mount that the U.S. economy may be slowing.

At the same time, corporate earnings are facing pressure. A mix of weakening demand, tariff-induced inflation and rising input costs are threatening profit margins. All of this is occurring as the Federal Reserve remains stuck in a holding pattern, with inflation still stubborn and rate cuts pushed further into the future.

The result? Stock investors are left trying to navigate a complex and increasingly fragile landscape—just as the traditional summer slowdown begins.

Ultra-Short-Term Bond ETFs: A Hot Summer Trade?

With all this uncertainty, caution may be the smartest summer strategy.

Some investors are flocking to ultra-short-term Treasury ETFs like the iShares 0-3 Month Treasury Bond ETF (SGOV) and the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), which offer attractive yields and low risk. These ETFs are designed to track the shortest end of the yield curve, meaning they’re less exposed to interest rate volatility and serve as a cash-like holding with returns north of 4%.

For those still looking to stay invested in equities but reduce risk, defensive sector ETFs like the Consumer Staples Select Sector SPDR Fund ETF (XLP) and the Utilities Select Sector SPDR Fund ETF (XLU) can help smooth out the ride. These sectors tend to perform more consistently during economic downturns, as they rely less on consumer or corporate discretionary spending.

Investors might also look outside the U.S. for diversification. International stock ETFs like iShares MSCI EAFE ETF (EFA) and the Vanguard Total International Stock ETF (VXUS) offer potential upside in regions that may be more insulated from U.S. fiscal or political risks.

And for investors who want a volatility hedge, the ProShares VIX Short-Term Futures ETF (VIXY), which tracks short-term VIX futures, could be a smart tactical play if choppiness returns to markets.

Final Thoughts: Seasonality or Not, Stay Alert

While the start of summer trading often means quieter markets, 2025 is shaping up to be anything but typical. Whether or not "Sell in May" holds up this year, the economic crosscurrents of slowing growth, rising debt, inflation risk and a strained bond market make for a tricky investment backdrop.

Seasonal trends can be useful guides, but in this kind of environment, caution, diversification and a defensive posture may be the smartest ways to weather the months ahead.