A Santa Claus rally refers to the increase in the stock market that usually occurs in the last week of December through to the first few days of January. Various research over the years has shown this to generally be the case. In fact, last year, the FTSE 100 gained over 1% in December and over 2% between 24 December and 5 January. There’s a possibility the flagship UK index could rise again this year. For my portfolio, I think that an FTSE 100 index ETF offers me the best chance of participating in a rally.
The ETF
An ETF (exchange-traded fund) is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers. I believe that because a FTSE 100 ETF offers me access to all the companies in the index, this could be the best approach for me.
There’s a lot of choice when it comes to a FTSE 100 ETF. Most, if not all, of the major investment companies offer a fund. In selecting a fund there are a variety of strategies, however, I usually consider the three factors that are most important to me. That is, fund size, expense ratio, and whether I want dividends or not.
The fund I’ve selected for my own portfolio is iShares FTSE 100 (LSE: ISF). By fund size it’s the biggest with over £10bn. It’s also among the cheapest, with an ongoing charge of 0.07%.
Finally, this fund pays a dividend. One of the major plus points of the FTSE 100 is that there are so many established, large companies in the index that can pay dividends. Although there is a choice of whether to have the accumulation option or the dividend-paying option of this ETF, for my own portfolio I choose the latter option every time. Currently, the dividend yield is 3.71%.
Is the Santa Claus rally real?
Lots of research show that the Santa Claus rally does exist. Theories to explain it include increased Christmas shopping and institutional investors settling their books before going on holiday over the festive period.
However, it could just be a coincidence and it might not happen this year.
This December the markets have some clouds over them. The Omicron variant of Covid is, sadly, spreading faster than first thought. This could impact Christmas spending. Additionally, worries about inflation and rising interest rates could keep wallets firmly shut.
That said, I can’t help thinking that the specialty retailers like Burberry Group, Next, and JD Sports will do well over this festive period after the subdued Christmas we had last year. As will the big UK supermarkets like Tesco and Sainsbury.
In any case, Santa rally or not, I’m still comfortable holding a small allocation of iShares FTSE 100 among my holdings as part of a diversified portfolio.
