Playing The Santa Rally With ETFs & Stocks

After a spectacular six-year bull run, the U.S. stock market got caught up in a nasty web of never-ending worries. It all started with the collapse in oil prices. Then came the instability in Greece, global growth concerns and the uncertainty of the Fed rate hike. Persistent weakness in China and the slump in commodities aggravated the woes.

As a result, the S&P 500 and Dow Jones indices are trading in the red in the year-to-date frame, losing 1% and 2.3%, respectively (read: 5 ETFs Losing Half or More of Their Value in 2015).

But the trend might reverse heading into the winter holidays if Santa pays a call. A Santa rally has gained coinage in the investment world, referring to the increase in stock prices in the final week of the calendar year (i.e. between Christmas and New Year’s Day) and extending into the first two days of the New Year. According to the 2016 Stock Trader’s Almanac, the Santa Claus rally has yielded average positive returns of 1.4% in 34 of the past 45 holiday seasons since 1969.

Other research also confirmed this trend. If we dig into historical data dating back to 1896, the Dow Jones Industrial Average has a track record of gaining an average of 1.7% during this seven-day trading period. And this has happened 77% of the time.

Santa on The Way!

The Fed has raised interest rates for the first time in nearly a decade with a dovish view for future hikes. It is a clear signal that the U.S. economy has largely emerged from the impact of a financial crisis supported by solid labor market fundamentals and a gradually increasing inflation rate. This in turn has lifted consumer confidence providing a boost to the stock market, setting the tune for a Santa rally.

This is especially true as the stock market gained momentum at the start of this week with both the S&P 500 and Dow Jones gaining 1.7% each. Further, year-end seasonal factors such as holiday optimism, tax-related affairs, people investing their Christmas bonuses, short sellers going on vacation, and the “January effect” added to the strength. As such, Santa seems to be just round the corner but the rout in commodities and the resultant stress in the junk bond space could block its way. Nevertheless, the oil price has rebounded slightly from their 11-year low, bolstering hopes of a bullish market (read: How the Oil Crash Impacted the Junk Bond ETF World).

As hopes start building for a Santa rally, we have highlighted a trio of ETFs and stocks that could provide investors with happy returns in the coming days and weeks.

ETFs to Buy

While there are a number of ETFs that are expected to benefit from the Santa Claus rally, we have highlighted three growth funds that have a higher potential to move upward when the markets go up. These products have been leading the broad market by a wide margin and have a top Zacks ETF Rank of 1 or ‘Strong Buy. Further, these provide a broad play across various sectors rather than specific ones.