3 ETFs to Trade in May Amid Stock Market Uncertainty

In a move few saw coming, the S&P 500 added 12.7% in April to post its biggest monthly gain in over 30 years as investors pinned their hopes on the economy reopening sooner than expected and cheered a range of COVID-19 treatments that showed promising test results.

However, mixed first quarter corporate earnings, along with mounting tensions between the United States and China relating to the handling of the pandemic, threaten to derail last month's impressive recovery effort. Furthermore, market sentiment may sour this week after Warren Buffett's Berkshire Hathaway Inc. (BRK.B) revealed that its cash stockpile grew to $137 billion by the end of March and that it is a net seller of stocks so far this year.

Those who expect the "sell in May and go away" adage to play out on Wall Street this year should consider these three exchange-traded funds (ETFs) that generally outperform during times of heightened uncertainty. Below, we review the metrics of each fund and explore possible trading tactics.

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

With net assets of almost $800 million, the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) aims to deliver returns that correspond to the S&P 500 VIX Short-Term Futures Index – a benchmark with exposure to near-month CBOE Volatility Index futures contracts. Traders can buy the fund to hedge against falling stock prices, given that it typically moves in the opposite direction to the S&P 500. Nearly 50 million shares exchange hands each day on tiny spreads to minimize transaction costs. Although VXX has gained 150% year to date as of May 4, 2020, it has pulled back 18% in the past month.

The fund's share price staged an impulsive move higher between late February and mid-March as stocks sold off. However, a retracement to the 61.8% Fibonacci retracement level of that move provides a high-probability entry point. Those who buy the dip should anticipate a retest of the Fibonacci grid high at $78.84 but exit if price breaches the April low at $35.85.

Direxion Daily FTSE China Bear 3X Shares (YANG)

Launched in 2009, the Direxion Daily FTSE China Bear 3X Shares (YANG) seeks to return three times the inverse daily performance of the FTSE China 50 Index. The fund essentially bets against 50 large-cap Chinese stocks traded on the Hong Kong Stock Exchange (HKSE), meaning that it's likely to rise if trade negotiations between Washington and Beijing break down. A tight 0.09% average spread, coupled with a daily turnover of 642,000 shares, allows active traders to exploit short-term tactical moves. As of May 4, 2020, YANG controls $62.46 million in assets under management (AUM) and is little changed year to date. The fund also issues a small 1.24% dividend yield.

Since reaching a 52-week high in mid-March, YANG shares have retraced within a falling wedge pattern, with the recent low coming within 4% of the early January trough. The price surged over 10% Friday on substantial volume to close above the pattern's top trendline in a move that could trigger further momentum-based buying this week. In terms of trade management, consider placing a stop-loss order under the April 29 low at $36.20 and targeting a move to crucial overhead resistance at $65.

Direxion Daily Gold Miners Index Bull 2X Shares (NUGT)

Created in 2010, the Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) has an investment mandate to return twice the daily performance of the NYSE Arca Gold Miners Index. The fund, which charges a 1.17% management fee, essentially provides a leveraged play on gold mining companies, and to a lesser extent, silver mining companies in both developed and emerging markets. An average penny spread, along with share turnover in the millions most days, keeps trading costs in check. NUGT has net assets of $629.27 million, yields nearly 3%, and is trading 64% lower on the year as of May 4, 2020.

Despite the ETF's large year-to-date loss, its price has trended steadily higher over the past month as investors turn more defensive. The fund opened Friday's session lower but reversed throughout the day from the $60 area – a level that finds support from the top trendline of a pennant pattern. Traders who buy here should think about positioning a stop beneath the pennant's low just above $50 and booking profits near a prominent horizontal line at $125, where previous support now becomes resistance.