3 ETFs To Consider For A Santa Claus Rally

etfs etfsGood tidings come for the U.S. equity markets, with gains of 26.5% for the S&P 500 and 22.2% for Dow Jones in the year-to-date time frame. Unlike the lackluster rally in 2012, the bull trend could definitely continue this December if the Santa Claus rally proves to be real.

According to market belief, December has a proven track record of being a top performing month for the S&P 500. The stocks tend to move up in the anticipation of various factors such as general holiday season cheer, tax-related affairs, and people investing their Christmas bonus. This holiday bonanza is called a ‘Santa Claus Rally’.

Over 50 years, the S&P 500 has a track record of gaining 1.9% on average in the month of December. In fact, according to the Stock Trader’s Almanac, the biggest jump in stocks can be seen through the final week of a calendar year (i.e. between Christmas and New Year Day).

Here Comes a Santa Claus Rally

Given strong macro trends and increased investors’ appetite for riskier assets (i.e. equities over bonds), it appears that 2013 would see the best Santa Claus rally in the past few years. This is especially true given that equity ETFs/ETPs have pulled in a total of $213.5 billion funds since the start of the year through November end. This is higher than $124.4 billion seen in the year-ago period.

Additionally, a slew of positive economic data on employment, manufacturing, housing, consumer spending, and GDP growth supports the Santa Claus rally. The economy created 203,000 jobs in November, leading to a decline in the unemployment rate to 7% from 7.3%.

Further, the political gridlock between the White House and Republican lawmakers seems to have eased with a tentative two-year budget deal, which if approved would end the three years of impasse and fiscal instability in Washington. This move is definitely a positive step for the economy and the stock markets as a whole.

Improving conditions in Europe and China would further propel the market higher.

Though upbeat data and strong momentum in the economy has raised market speculation over the Fed curtailing its QE3 program and spread panic in market, a big taper in the near future still seems unlikely.

The unemployment scenario has brightened a bit, but inflation is still low at 1.1% in November. Further, the U.S. consumer confidence continued to decline and dropped to a seven-month low in November (read: 3 Covered Call ETFs to Pump Up Your Income).

Moreover, even if the Fed tapers, market experts think that the economy and financial markets could well endure the Fed’s wind-down plan, suggesting good trading ahead. As a result, the Fed’s curbing of QE3 does not seem to be much of an issue and Santa Claus could even bring gifts for various sectors and asset classes in the days ahead.

ETFs to Consider

For investors seeking to ride out the Santa Claus rally, we have highlighted some of the ETFs that provide a broad diversified play in various sectors rather than specific ones. These products have been leading the large cap space for most of this year, clearly outpacing the broad market fund (SPY) by a wide margin.

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