Forget Sell In May: Buy These ETFs Instead This Year

Gregory Daco, chief U.S. economist at Oxford Economics estimates that the domestic economy will expand about 13% year over year in Q2. For the year, it expects growth of 7.5%, the best performance since 1951, a New York Times article noted. This means that the winning market momentum will not settle down soon.

Consumers Sitting on Good Savings

Thanks to multiple rounds of government relief payments, households now hold a joint $4.1 trillion in savings in the first quarter, considerably up from $1.2 trillion before the pandemic began. Such high savings are likely to be invested in the stock market as government bond yields are still quite lower than the pre-pandemic period.

Capital Gain Tax Hike Not a Big Concern?

In 2013, the S&P 500 added about 30% despite the nine percentage-point increase in capital gains tax rate. In 1981, the S&P 500 skidded 10% despite the drop in the tax rate by about eight percentage points, a Barrons’ article noted.

Moreover, the move of capital gain tax hike would hurt earnings of the top 0.3% of Americans. Plus, the proposal may come across as less tough during negotiations in Congress. For example, UBS expects a 28% long-term capital gains tax rate instead of 39.6%, as quoted on CNBC (read: Likely Capital Gain Tax Hike a Buying Point for These ETFs?).

Any Caveat to Market Rally?

After a superb run in 2020 and the early phase of 2021, some profit booking is natural now. A spike in inflation and a likely capital gain tax hike would cause some sell-offs in the near term, though it might not continue for six months up until October.

ETFs in Focus

Against this backdrop, below we highlight a few ETFs that could be worth buying in May.

SPDR S&P Bank ETF (KBE - Free Report)

Banks are in the sweetest spot as strong household savings ruled the fear for delinquencies or default on loans in the banking sector. In any case, banking is an undervalued sector currently. Earnings have been upbeat in the sector. A prospective rising rate environment is another plus for the banking stocks. KBE is thus a good bet (read: Banking Earnings Upbeat: Time to Buy Financial ETFs on Value?).

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