Forget “Sell In May,” Try “Switch In May” Instead

Share This Article
May 17, 2017 4:14pm NYSE:IWM


From Grant Wasylik: Last year was another cruddy year for active equity managers.

According to the S&P Dow Jones SPIVA 2016 scorecard:

66% of large-cap managers …

89% of mid-cap managers …

And 86% of small-cap managers …

Underperformed the S&P 500, S&P MidCap 400 and S&P SmallCap 600, respectively.

That may sound bad. But, it’s even worse over the longer term …

Source: SPIVA scorecard, data as of 12/31/16

As you can see above, 88% of large-cap managers have underperformed the S&P 500 Index over the last five years.

Yet, it’s even worse for smaller-sized stocks …

Since 2011:

90% of mid-cap managers have underperformed the S&P MidCap 400 Index.

And 97% of small-cap managers have underperformed the S&P SmallCap 600 Index.

Curious about even longer-term returns?

It’s still ugly.

Over the last 10 years, underperformance checks in at 85% (large-cap managers), 96% (mid-cap managers) and 96% (small-cap managers). And going back 15 years, outperformance is still painfully high at 92%, 95% and 93%, respectively.

One thing’s for sure …

It’s extremely difficult for professional investors to outperform their benchmarks over anyperiod.

But, I have a simple strategy that’s historically bucked this trend …

It’s from my colleagues at The Leuthold Group.

[For those of you who haven’t heard of The Leuthold Group, they’re one of the top institutional research firms in the world. (I’m honored to have access to their information.) Leuthold uses proprietary data to do extensive research on financial markets. Individual investors, financial advisers and institutions can view the firm’s product offerings — mutual funds and separately managed accounts — here.]

Leuthold has found a simple way to skirt the poor prospects of active management and beat the benchmark.

Their approach to outperforming the market is tied to the “Sell in May” phenomenon.

The time-honored “Sell in May” trading adage warns investors to liquidate their stock holdings in the month of May to avoid a seasonal drop in equity prices. Then, it urges them to get back into stocks in November.

The goal is to skip the worst six months for stocks (May-October), but be fully invested during the market’s strongest six months (November-April).

Historical data supports this old adage …

S&P 500 annualized returns during the stronger November-to-April span have been roughly 2X the weaker May-to-October stretch.

But, what few investors know is the “Sell in May” effect is even more pronounced in small caps …

The same study for small caps shows a 10-to-1 performance variance over the last 91 years!

Plus, the combination of the Ibbotson SBBI and Russell 2000 (benchmarks for small caps) also easily outpaced the S&P 500 during the dominant November-to-April interval, +21.2% vs. +13.4%.

The market historians at Leuthold have honed in on a market-beating strategy connected to the “Sell in May” pattern …

We’ll call it “Switch in May” instead.

Here’s a chart depicting their calendar strategy:

In this month’s “Perception Express,” Leuthold said:

The seasonal pattern has been so powerful that one could have actually beaten the Small Cap “buy-and-hold” approach by moving assets into Treasury bills during the May through October period. Since 1926, this strategy has generated an annualized return of +12.0% versus +11.3% for the Small Cap Total Return Index. The standard deviation of the active strategy is 18.6% versus 28.3% for buy-and-hold, thanks to the six month intervals when the portfolio is safely parked in cash.

Not only is this strategy easy to understand, it’s also easy to execute.

For the small-cap stock component (November-April), an investor could use an ETF such as the iShares Russell 2000 ETF (IWM).

And for the safe Treasury bill component (May-October), investors could sit in cash or cash equivalents, buy an actual T-bill or invest in an ETF like the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL), the Goldman Sachs TreasuryAccess 0-1 Year ETF (GBIL), the iShares Short Treasury Bond ETF (SHV) or the PIMCO Enhanced Maturity Active ETF (MINT).

Keep in mind, the short-term fixed-income ETFs may not be perfect substitutes.

Next time you’re ready to “Sell in May,” consider “Switch in May” as an alternative.

The iShares Russell 2000 Index ETF (NYSE:IWM) was trading at $135.09 per share on Wednesday afternoon, down $3.54 (-2.55%). Year-to-date, IWM has gained 0.18%, versus a 5.59% rise in the benchmark S&P 500 index during the same period.

IWM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 31 ETFs in the Small Cap Blend ETFs category.

This article is brought to you courtesy of Uncommon Wisdom Daily.

About the Author: Grant Wasylik

grant-wasylikGrant Wasylik is an analyst and editor for Uncommon Wisdom Daily — a division of Weiss Research.

Before joining the investment newsletter business, Grant worked as a portfolio manager, lead research analyst and head trader for a billion-dollar wealth management firm for 10 years. He also spent a few years working in a specialized risk-trading department at Charles Schwab — where he was the first-ever, external hire into this elite department. In his first stint in the securities business (after passing Series 7, 64 and 24 exams), Grant ran a margin department and supervised a trade desk for a discount brokerage firm.

Prior to coming to Uncommon Wisdom Daily, Grant was co-editor and chief analyst of The Palm Beach Letter for two years. This monthly publication — with over 70,000 subscribers — focused on safe, income-oriented investments.

Due to his vast investment experience, Grant has a deep contact list comprised of 400-plus mutual fund, ETF, index, hedge fund and other top-notch financial professionals. In addition, he receives special invitations to — and attends — several of the world’s top investment conferences each year.

Read Next

Get Free Updates

Join over 50,000 investors who get the latest news from!

Most Popular

From Our Partners

Explore More from

Free Daily Newsletter

Get daily ETF insights from our market experts. Never miss another important market development again! respects your privacy.

Best ETFs

We've rated and ranked nearly 2,000 ETFs and ETNs using our proprietary SMART Grade system.

View Top Rated ETFs

Best Categories

We've ranked dozens of ETF categories based on relative performance.

Best ETF Categories