Does the Turn-of-the-Month Effect Work for Sectors?
Posted in Calendar Effects
January 13, 2010
A reader inquired whether the Turn-of-the-Month Effect, a significant concentration of positive stock market returns around the turns of calendar months, works for stock market sectors. To investigate, we measure turn-of-the-month (TOTM) returns for the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:
Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)
In an additional (shorter) test, we add measurement of TOTM returns for SPDR Gold Shares (GLD) as a proxy for gold. We define TOTM (per the Strategy Test) as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and for S&P Depository Receipts (SPY) as a benchmark from 12/22/98 through 1/8/10 (133 months) and for GLD from 11/18/04 through 1/8/10 (62 months), we find that:
The following chart compares average gross TOTM returns for each of SPY and the sector ETFs to those for all respective eight-trading day intervals over the entire sample period. Results indicate that TOTM returns are abnormal for all sectors, but varying in magnitude. Standard deviations of these returns are mostly a little smaller for TOTM than for all respective eight-trading day intervals, but still large (in the range 2.5% to 4.9%) in comparison to average returns.
Do these results hold for a more recent subperiod?
The next chart compares average gross TOTM returns for each of SPY, the sector ETFs and GLD to those for all respective eight-trading day intervals since 11/18/04. Results again indicate that TOTM returns are abnormal (but less so than above) for all nine sectors, but not for GLD.
For another perspective, we summarize abnormal TOTM returns for the two sample periods.
The final chart compares abnormal TOTM returns (before trading frictions) for SPY, the sector ETFs and GLD since 12/22/98 (except for GLD) and since 11/18/04. As noted above, abnormal returns are mostly smaller for the more recent period.
Exploitation implies trading frictions that would shave these abnormal returns depending on account size, ETF liquidity and specific broker fees (and tax impacts, if applicable).
In summary, evidence from simple tests on recent samples supports belief that the turn-of-the-month effect holds for major stock market sectors but not for gold.
