There is one well-known and popular trading adage “Sell in May and Go Away”, which suggests that investors might want to avoid investing in the stock market this month due to seasonality. According to this investment saying, the U.S. stock market underperforms during the summer months (from May to October end).

While the historical underperformance is a point to be noted, a new research from a U.S. equity strategist at S&P Capital IQ indicates that it might be foolish to quit the stock market altogether. Rather, investors could rotate into the defensive sectors during this soft six-month period (read: These Smart-Beta ETFs Survive Market Volatility).

The new study has been done on the S&P SmallCap 600, which have returned 10.5%, excluding dividends, since 1979 during the November–April period. On the other hand, the index has delivered 2% gains on average over the next six months. Meanwhile, the data also shows that defensive stocks have gained over 3% during May to October since 1995. This is much better than holding cash, and suggests that investors can try out safer avenues for this rough period to remain invested in the equity world.

Here are the three ETF strategies for investing in May:

Be Safe with Defensive ETFs

Defensive sectors like consumer staples, health care and utilities generally act as safe havens during any market turmoil. This is especially true as stocks in these sectors generally provide higher returns when the market struggles to hold gains. The current market fundamentals erase bullishness from the market, as the Fed downgraded its outlook for the labor market and economy in its latest policy meeting. The central bank will wait for more months before raising interest rates. Further, weak corporate earnings, strong dollar and a slew of disappointing data softened sentiments (read: Winning ETF Picks For Q1 Earnings Season).  

Given this, defensive sector ETFs seem to be good plays for the next few months.  Some of the top ranked funds from these sectors include iShares U.S. Healthcare Providers ETF (IHF - ETF report),  PowerShares DWA Consumer Staples Momentum Portfolio (PSL - ETF report), PowerShares S&P SmallCap Utilities Portfolio (PSCU - ETF report), Guggenheim S&P 500 Equal Weight Health Care ETF (RYH - ETF report), SPDR S&P Health Care Services ETF (XHS- ETF report) and PowerShares Dynamic Healthcare Sector Portfolio (PTH). IHF has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating while the others have a Zacks ETF Rank of 2 or ‘Buy’ rating.

Beat the Market with Low Volatility ETFs

Low volatility ETFs has the potential to outpace the broader market in bearish market conditions or in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. As a result, low-volatility strategies appear safe amid market turbulence, and reduce losses in declining markets while generating decent returns when the markets rise.

While there are several options in the space, the two most popular are PowerShares S&P 500 Low Volatility Fund (SPLV - ETF report) and iShares MSCI USA Minimum Volatility Index Fund (USMV - ETF report). The former tracks the S&P 500 Low Volatility Index, which consists of 100 stocks from the S&P 500 Index (SPY) with the lowest realized volatility over the past 12 months while the latter provides exposure to the stocks having lower volatility characteristics relative to the broader U.S. equity market by tracking the MSCI USA Minimum Volatility (USD) Index (read: Why Are Low Volatility ETFs Underperforming Now?).
 

Hedge Portfolio with These Inverse ETFs

Investors worried about the May swoon could also go short with stocks via ETFs. There are a number of inverse or leveraged inverse products currently available in the market that offer inverse (opposite) exposure to the various stock market indexes. While a leveraged play might be a risky option, inverse ETFs are interesting choices and provide hedging strategies in a bearish market.

Below, we have highlighted the most popular options in this space for each market cap. All these are from a single issuer – Proshares:

Short S&P 500 ETF (SH - ETF report) and Short Dow30 (DOG - ETF report) provide inverse exposure to large cap stocks. The former offers opposite performance of the S&P 500 while the latter targets Dow Jones Industrial Average. Meanwhile,Short QQQ ETF (PSQ - ETF report) seeks to deliver the opposite return of the Nasdaq 100 index (see: all Inverse Equity ETFs here).

Short MidCap400 (MYY - ETF report) and Short Russell 2000 ETF (RWM - ETF report) target the inverse performance of the mid and small cap segments of the broader U.S. market by tracking the S&P MidCap 400 and Russell 2000 index. Likewise, investors could also apply short strategies in different sectors through ETFs.