Has sell in May and go away come early? It’s not over just yet for stocks

1st May 2014 by Edmund Shing

Bond funds back in vogue in April

Now that May Day is upon us, we can start to look back at the month of April and pick out some interesting market trends (and not just the overly-repeated “sell in May and go away”!).

One way to do this is to look simply at which types of investment funds have been popular over the last month, and which have not. Now, normally this type of data takes some time to be collated, and so there is a lag between the month end and the date that the monthly data is released.

But in the case of investment flows into and out of US-based exchange-traded funds (ETFs), we already have some indications of which asset classes and funds were popular, and which were avoided or even sold by both retail and institutional clients (the US ETF market is approximately 50%:50% split between these two types of investor).

Bond ETFs grab the lion’s share of April inflows

From looking at the ETF flow data for April (from etf.com), we can see that  both US and international bond ETFs were very popular, with American investors putting in more than $3.25bn over the month.

To quote etf.com:

In the past month, more than $1.08 billion flowed into international bond ETFs—roughly twice the asset flows seen into the segment in the entire first quarter. Our data show that it was emerging market sovereign debt funds that led in net creations, attracting $671 million in April alone—the most popular fixed-income segment in the period.

So within the international bond segment, there was a big resurgence in interest in emerging market bonds, which is perhaps unsurprising given that their yields are now not far off the yields offered by US high yield corporate bond funds (which now yield only 5.4%), while you are still investing in investment-grade government debt, which in theory is a lot less risky than high-yield corporate bonds.

US Dollar-based Emerging Market Bonds were particularly popular, as exemplified by the iShares J.P. Morgan USD Emerging Markets Bond ETF (US code: EMB) which currently yields a relatively attractive 4.6%.  Figure 1 illustrates the steadily rising price of this ETF throughout most of this year to date, up some 5% from the early-February lows.   

1. JP Morgan USD Emerging Market Bond ETF on the Rise

Source: Bloomberg

 There is a London-listed version of this ETF for UK and European investors, the iShares J.P. Morgan USD Emerging Market bond ETF (code: SEMB.L), priced in sterling (£65.85 as of 1 May 2014) if you feel that you want to invest in emerging market bonds and so benefit from these attractive yields, but without taking on currency risk.

Long-term US Treasury bond ETFs were also very popular last month, also taking in significant inflows as government bond yields in general declined, as they have done through much of 2014 so far.

The Vanguard Extended Duration Treasury ETF (US code: EDV) has been a prime beneficiary of US investor flows, and continues to march steadily higher (Figure 2) as 30-year US government bond yields decline (starting the year at 4%, and now under 3.5% – remember, for bonds the yield moves in the opposite direction to prices, so falling yields means higher bond prices).

2. Vanguard Extended Duration Treasury ETF Performing Well
Source: Bloomberg

 This ETF has gained an impressive 14.7% since the beginning of the year, trouncing stock market funds which are more or less flat over the same period.

If you wanted to buy a broadly similar US government bond ETF in the UK, you could do worse than look at the iShares USD Treasury Bond 7-10 year ETF (code: IBTM.L)

 Has “Sell in May and Go Away” come early?

Normally, the under-performance of stock markets and the out-performance of government bonds takes place over the 6 months from May to the end of October, while the bulk of stock market gains have typically been made in the November-April period (commonly called the “Halloween effect“).

However in this case, note how US and European stock markets have basically ended flat for the month of April, while bond markets have performed well, seeing both falling bond yields and rising prices. This might suggest that the “Sell in May” effect may have been anticipated by markets, and has already started to take place in April. Much as the fabled “January effect” (where small-cap stocks in particular tend to perform very well) has over time taken place more in December in recent years.

So is it game over for stocks? Not just yet…

All of this might suggest that it is time to lighten up on stocks and stock funds, and instead move into bonds and bond funds for the next 6 months… I wouldn’t go that far, as we are still at the point where the UK and global economies are improving nicely, and where appealing dividend yields well in excess of government bond yields can still be found in the UK stock market as well as abroad.

If you are really looking for yield, how about considering the iShares UK Dividend ETF (code: IUKD.L), which currently offers a 4.2% yield, far higher than the equivalent yield that you can achieve with UK government bonds (10-year gilts currently yield around 2.6-2.7%). This ETF holds a relatively diversified portfolio of UK large-cap stocks such as electricity company SSE, house builder Berkeley Group and fund manager Ashmore.

3. UK Dividend ETF Grinding Higher

Source: Bloomberg


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