Election Year Might Not Be So Bad For Equity ETFs

With the S&P 500 off about 8 percent to start the year, advisors and investors may be left thinking that an early case of election year volatility is afoot. Conventional wisdom dictates that stocks can struggle in presidential election years and that those struggles can be more pronounced in open elections, or years in which an incumbent is not defending the White House. That is the case this year.

Investors' treatment of exchange-traded funds to start 2016 indicates a desire for safe-haven assets. Five of this year's top 10 asset gathering funds are bond funds. Just three are equity ETFs, two of which are the Utilities SPDR (ETF) XLU and the iShares MSCI USA Minimum Volatility (iShares Trust USMV). Conversely, all of 10 of this year's worst ETFs in terms of lost assets are equity funds.

Related Link: How Do Stock Markets Perform During A Presidential Election Year?

Historical Performance Recap

There is some good news. According to a study by index provider FTSE Russell, the last year of presidential terms, particularly those of two-term presidents, of which President Obama is one, can be kind to stocks.

“The Russell 1000 Index, reflecting US large cap stocks, and the Russell 2000 Index, reflecting US small cap stocks, have had positive returns in nearly every fourth year of a US presidential term since Ronald Reagan first took office in 1980. The only exceptions were in the midst of the global financial crisis in 2008 for the Russell 1000 Index and Russell 2000 Index (US large- and small-cap stocks, respectively) and in 1984 for the Russell 2000 Index (US small cap US stocks),” according to the index provider.

Investors can access those indexes via the iShares Russell 1000 Index (ETF) IWB and the iShares Russell 2000 Index (ETF) IWM, among other ETFs.

While 2008, the last year in President George W. Bush's second term, was brutal for stocks, the Russell 1000 and the Russell 2000 performed admirably during other presidential election years. In addition to 2008, the only other presidential election year included in the FTSE Russell in which the Russell 2000 closed lower was 1984. Since 1984, the only presidential election year in which the Russell 1000 finished lower was 2008.

“Historical index analysis suggests that, while past performance is no guarantee of future results, US markets may get caught up in the optimism that an election brings, be it the promise of something new or the continuation of something good,” said FTSE Russell senior index research analyst Mat Lystra.