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May-25 Outlook

May ETF Outlook: 5 Data-Driven Picks for the Month Ahead

This month, TrendWell Digest highlights five ETF picks showing strong signals based on historical indicators: XLU, DGT, XLK, IJR, and XLY. Since October 2000, when similar signal conditions aligned, this group of ETFs delivered an average historical annualized return of 11%, compared to significantly lower returns when these signals were absent.

April ended with modest gains across U.S. equity markets despite increased volatility from new tariff announcements that rattled supply chain-related sectors. However, resilience in the labor market, softening core inflation, and a stable Federal Reserve outlook helped rebalance investor sentiment. These conditions support sectors linked to interest rate sensitivity, consumer strength, and long-term growth—all themes echoed in the signals behind this month’s picks.

XLU (Utilities Select Sector SPDR Fund)

Tracks: U.S. utility companies (electric, water, gas).

  • Low volatility in financials (XLF): Three-month volatility dropped to 28% of historical average. Historically, XLU returned 15% when volatility in XLF was this low, versus 6% when it wasn’t.
  • May seasonality: Utilities have historically performed well in May, returning 10% on average when this month appeared as a positive signal, compared to 5% in other months.
  • Low volatility in healthcare (XLV): XLV’s three-month volatility fell to 41% of historical average. XLU returned 10% in these cases, versus 4% otherwise.

DGT (SPDR Global Dow ETF)

Tracks: A globally diversified basket of blue-chip stocks.

  • Overbought materials sector (XLB): RSI surged to 192% of historical norm. DGT returned 14% historically when this happened, versus 7% otherwise.
  • Declining energy sector (XLE): A 12-month price drop of -12% has historically preceded DGT returns of 8%, compared to 4% otherwise.
  • Flat Fed Funds Rate (DFF): A 0% change in the prior month correlates with DGT returns of 6%, versus 4% when the rate moved.

XLK (Technology Select Sector SPDR Fund)

Tracks: Major U.S. technology firms.

  • Steep yield curve (T10Y2Y): A 400% increase in the six-month change indicates rising optimism for long-term growth. XLK returned 79% historically under similar shifts, versus 9% otherwise.
  • Consumer staples lag (XLP): A modest 1% six-month gain in XLP is a soft signal, which historically led to XLK returns of 24%, versus 7% otherwise.
  • Inverse correlation with telecom (IYZ): Current correlation with SPY is -458% of historical average, aligning with XLK returns of 16%, versus 4% otherwise.

IJR (iShares S&P Small-Cap 600 ETF)

Tracks: U.S. small-cap companies.

  • Price recovery in staples (XLP): At 71% of 52-week peak, this historical setup has preceded IJR returns of 18%, versus 9% when higher.
  • Modest economic strength (M1NS): A six-month gain of 3% in this broad indicator historically led to IJR returns of 14%, versus 6% otherwise.
  • Sharp decline in treasury/fed spread (T3MFF): A drop of -233% month-over-month aligns with historical IJR returns of 12%, compared to 5% otherwise.

XLY (Consumer Discretionary Select Sector SPDR Fund)

Tracks: U.S. discretionary spending sectors like retail and leisure.

  • Price consolidation in staples (XLP): Also at 71% of 52-week peak. When this has occurred, XLY returned 19% annually, versus 5% otherwise.
  • Soft PPI (PPIACO): A 1% six-month increase signals easing inflation pressure, historically tied to XLY returns of 18%, versus 4% otherwise.
  • Elevated financial sector volume (XLF): Trading volume in XLF is 36% above historical 12-month norms, a condition that correlates with XLY returns of 15%, versus just 2% when lower.

Despite tariff-related volatility in April, a resilient macro backdrop—anchored by a steady Fed, easing inflation indicators, and constructive market sentiment—suggests this data-driven group of ETFs may be favorably positioned for the weeks ahead.

We look forward to delivering continued insights—and we hope your portfolio continues to TrendWell.