It’s the beginning of a new year, and that usually leads to questions about which time periods during the year provide the best historical returns. To find out whether certain months have historically higher returns than others, we reviewed monthly and yearly nominal and risk-adjusted returns for SPY since January 1996. We also extended the analysis to see whether historical implied volatility could provide any information. The conclusions, especially for those who believe that performance is generally not time dependent or seasonal, were surprising.

To begin, nominal monthly returns showed a clear pattern favoring certain months. April, October, and November were the clear winners; February and September the losers:

Source: OptionMetrics

Interestingly, March and October had the highest range between the highest and lowest returns. The popular notion that extreme events occur with higher frequency in October may have some validity (although the same could be said of March):

Source: OptionMetrics

To see whether risk levels were commensurate to the nominal returns, we calculated Sharpe ratios for each month. There are several different risk-adjusted return measures, but they all attempt to adjust nominal returns by some measure of risk, whether standard deviation (Sharpe Ratio), beta (Treynor Ratio), or downside-only standard deviation (Sortino Ratio). There are others as well, each with their pros and cons, but the most widely used is the Sharpe Ratio. Below are the results: 

Source: OptionMetrics

Comparing nominal returns with the Sharpe ratios (see chart below), apparently risk did not increase commensurately during the months with the best nominal performance. For those months with the worst performance, the opposite was also true. 

Source: OptionMetrics

For options traders, the regular pattern of peaking in March and November suggests that the historical monthly trend of SPX implied volatility tends to display a seasonal bias (see chart below):

Source: OptionMetrics

The results of the performance and volatility analyses are somewhat surprising, and clear. Performance during certain months is clearly superior to others. April, October, and November have the highest monthly returns; February and September have the worst. Sharpe ratios confirm this on a risk-adjusted basis. Similarly, SPX implied volatility shows a clear tendency to bottom out in July and peak during October. By these measures, and similar to many commodities, apparently SPY performance and SPX implied volatility can be considered somewhat seasonal. This is good news for investors and traders that can select which month to be active.

Brett Friedman is with Winhall Risk Analytics and is an OptionMetrics Contributor.

For more insights on ETFs, equities, commodities and futures, the options market, and volatility, visit the OptionMetrics blog.

 

Divya Patel assisted in the preparation of this article. Ms. Patel is a M.S. candidate in financial engineering at the NYU Tandon School of Engineering. 

There is an inherent risk involved with financial decisions. The information in this article is for informational purposes only and is not intended to provide financial advice. Views expressed are those of the author and are not necessarily those of the company.