The summer months tend to be the time of year that sees lower trading volumes and lower volatility. With people focused more on getting out to enjoy the warm weather (especially this year after missing out on most of last year due to the pandemic), the equity markets tend to enjoy a relative period of calm before heading into the potentially more volatile autumn months.
Low volatility and low volume environments tend to be favorable for risk asset prices generally moving up. Investors have consistently been showing a tendency to save and invest their government stimulus cash instead of spending, which adds another layer of support for a market that has shown a bullish tendency.
That makes for favorable conditions for adding risk to your portfolio. While things could still turn south if something unexpected occurs, the summer months tend to be a good time to enjoy an attractive risk/reward ratio for stocks.
With that in mind, if you're looking to pivot your portfolio in one direction or another for a potential short-term pop, I'd lean towards more aggressive growth options during the month of May. Here are a handful of ETFs that could take advantage of this trend.
iShares Russell 2000 Growth ETF (IWO)
Adding a riskier high reward play means choosing small-caps over large-caps and growth over value. Part of how well this fund could perform will depend on whether investors favor growth stocks over cyclical stocks, which they have over the past couple weeks.
The May jobs report may have fallen right in the sweet spot for growth outperformance. A strong jobs number could have sparked a cyclical rally as the markets feel confident that the recovery is picking up steam. A middle-of-the-road number, like the one we got, confirms the recovery is progressing but still has work to do. The likely leads investors to back off cyclical plays for the time being, but favor growth as a continued expansion play.
iShares Core MSCI Emerging Markets ETF (IEMG)
Emerging markets stocks have lagged the S&P 500 badly since February, but that's turned around over the past two weeks. Investors had been concerned that the COVID recovery was progressing much more slowly relative to the United States and it could delay any broader economic recovery. Also, China stocks have struggled as the government cracks down on some of the nation's biggest companies, while India got hit with a huge surge in coronavirus cases.
Now, India has seen a drop in new cases almost as fast as it saw an increase. China stocks have settled down and the weak dollar looks like it could act as a tailwind as short-term risks moderate and supply chain bottlenecks slowly begin to clear. I wouldn't push too far out on the risk spectrum as it pertains to emerging markets stocks, but a broad-based low cost option such as this should provide adequate exposure.
First Trust Nasdaq Cybersecurity ETF (CIBR)
Cybersecurity hacks will probably never go away making the demand for software solutions a big investment target for most companies worldwide. We just saw firsthand with the Colonial pipeline hack what one ransomware attack can affect the entire U.S. economy with gasoline shortages all over the country for about two weeks.
Hackers are stepping up their aggressiveness with more sophisticated tactics and the demand for cybersecurity solutions will continue to remain high. From a fundamental standpoint, cybersecurity stocks are pretty expensive, which is often the case, but the narrative could provide an extra bounce.
iShares MSCI USA Momentum Factor ETF (MTUM)
This might be a counterintuitive pick given how momentum has been perhaps the most disappointing performing factor strategy. But this is definitely a case where it's important to look forward and not back. That's because the portfolio just rebalanced itself at the end of May, which means it looks a whole lot different today than it did just a couple of short weeks ago.
Previously, MTUM has very heavy in tech and consumer discretionary stocks. Today, it's got nearly half of the portfolio's assets in the combination of financials and industrials, while only 17% now goes towards tech. That means MTUM has turned much more into a combination cyclical/growth play, which could be beneficial if you think stocks will rise but are unsure about which segment the market may favor.
SPDR Bloomberg Barclays Short-Term High Yield Bond ETF (SJNK)
If you're looking for fixed income options instead of equity options, junk bonds would be the way to go. They've been pretty much keeping pace with Treasuries over the past couple months, which means there hasn't been much of a return premium for taking on the extra risk.
If conditions are favorable for adding risk, high yield bonds work, but given their recent lack of outperformance, I'd stay a little more on the conservative end here by focusing on the short-term end of the maturity spectrum. A current 3.4% yield won't necessarily solve all of your income needs, but it should be a nice added benefit if the bond market remains bullish.