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‘Sell in May and go away’ is a long-held adage for active investors. But do the numbers really hold up?

Yes, with some important exceptions, says Brooke Thackray, a research analyst with Horizons ETFs Management Canada, who has studied the seasonal investing space for many years.

“On a risk-reward basis, it’s much better to be more aggressive in the stock market from late October to early May than it is in this six-month period that is coming up,” he says.

Mr. Thackray, who manages the Horizons Seasonal Rotation ETF (HAC-T), says there are some sectors buck the “go away” trend but, by and large, over the years, most of the big gains happen in the coldest months of the year and the biggest losses happen in the May-October period.

For the seasonal strategist, Canadians need to know the risks that come with broad exposure to markets in the middle part of the calendar and minimize them by reducing their exposure somewhat.

“It comes down to being more defensive in this time period and obviously looking for different sector investments as well,” Mr. Thackray says.

He’s not advocating that investors go all cash but rather seek out sectors that do better as the weather heats up.

That list includes, perhaps surprisingly, government bonds as investors “de-risk.” Other areas that tend to do well during this time include gold and biotechnology, as interest tends to grow in these sectors in July, before the fall convention schedule for the industries.

He has tracked seasonal performance back to 1950 and has found that the “unfavourable” half-year period has produced big gains of 10 per cent or more only nine times in 70 years versus 30 times for the November-to-April span.

When does this seasonal principle not hold true? Last year was an example of a period when the seasonal tendency flipped upside down after the market crash following the start of the COVID-19 pandemic.

“All of those times have happened in the summer months when we have been coming out of a recession or entering an extremely high growth mode – including last year,” he explains.

As a general guide, the six-month on/off approach works; however, ETF investors need to look at other factors as well, such as whether a particular sector has had a lengthy runup prior to coming into its historical seasonal sweet spot.

“All of this stuff is a tendency; it’s not a rule,” says Keith Richards, president and chief portfolio manager of ValueTrend, an investment firm based in Barrie, Ont.

He provides the example of technology stocks, which he calculated were overpriced last summer based on his analysis. He began selling that sector for his clients last August.

“Except for Google, most of them have gone exactly nowhere since September,” he says.

Mr. Richards is a follower of the Horizons analyst’s research and has read his book on seasonal investing but considers it more of a starting point for making investments.

“If you are an ETF investor, even though a sector has a tendency to do well over X period, like gold over July until the end of the year, but it may not this year. So you have to have a couple of other tools in your toolbox,” says Mr. Richards, a self-described “a technical guy,” who has his own investment book coming out soon promoting a sentiment or contrarian trading approach for beating market returns.

Rather than taking a purely seasonal approach, Mr. Richards recommends retail investors buy the S&P 500 SPDR ETF (SPY-A), which covers the S&P 500 index and the iShares S&P TSX 60 Index (XIU-T), which tracks the S&P/TSX 60 index. SPY has a management expense ratio (MER) of 0.095 per cent and has returned 12 per cent so far this year and 50 per cent over the past year. XIU has an MER of 0.18 per cent and has returned 12 per cent year-to-date and 32 per cent over the past year.

If investors want to try accounting for seasonality, Mr. Richards recommends taking 10 to 20 per cent and moving that portion to sectors that do well in the non-favourable months for the markets. “I did it for years and I did outperform the market by doing that.”

Mr. Richards says most retail investors shouldn’t rely on betting on sectors doing well or poorly in certain seasons because there are other factors. For example, a sector could be running above well above its 200-day averages. Retail investors “are not doing all that stuff,” he adds.

Another alternative for retail investors looking to capitalize on the seasonal trends is simply to buy the seasonal HAC ETF from Horizons.

“If you like the idea of someone doing all that rotation for you…buy a little bit of HAC,” he adds.

HAC is relatively pricey for an ETF, with an MER of 1.03 per cent, given the active approach. The ETF has returned 12 per cent so far this year and up 26 per cent over the past 12 months.

One concern of the ‘sell in May and go away’ approach for retail investors is the tendency to stay on the sidelines too long after, says Yves Rebetez, an ETF analyst and partner of Credo Consulting Inc. of Oakville, Ont.

“It’s great to get out, I wish everybody knew when to get out exactly, but the other tricky part is when to get in,” he says. “You want to avoid people getting into that whole mode of getting out and never getting in, or getting in when everybody is already in.”

Such an approach is not much different than market timing. “We all know that timing the market is a tricky, tricky beast,” he adds.

Mr. Rebetez argues markets are still experiencing the pandemic’s effects, which should continue to bode well for the energy sector and Canadian markets in general.

“The second that we release everyone from quarantine and everything, it looks like there is a lot of pent-up appetite to do everything we have not been able to do for 15 months” and calls for plenty of use of gasoline and aviation fuel.

“You don’t even have to make an energy call,” Mr. Rebetez says. “You could just buy the Canadian stock market, which... is fairly cyclical and has a whack of banks which look well-positioned to recoup some of the losses that they booked because they’re over-provisioned. And then you have material there which are essential and are experiencing some shortages, and of course plenty of energy.”

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