Seasonal Risks in ETF Performance: A Case for Strategic Caution and Valuation Timing

The 2025 investment landscape is marked by a confluence of seasonal risks and macroeconomic uncertainties, creating a compelling case for strategic caution. As the calendar flips to September—a month historically synonymous with market volatility and underperformance—investors must recalibrate their strategies to account for both cyclical patterns and asset-specific dynamics. This is particularly relevant for exchange-traded funds (ETFs), where seasonal trends can amplify or mitigate returns depending on valuation metrics, technical signals, and broader economic conditions.

The Weight of Seasonality: September’s Historical Headwinds

Seasonal risks in ETF performance are not abstract concerns. Data from the past century reveals that September is the S&P 500’s weakest month, averaging a 1.2% decline since 1928 [1]. In 2025, these historical trends align with contemporary challenges: rising interest rates, softening economic growth, and a market already burdened by extended valuations. BlackRock notes that years entering May with negative momentum—such as 2025—tend to see average returns of -1.6% over the subsequent five months [2]. This dynamic is compounded by the S&P 500’s elevated forward P/E ratio of over 20x, raising questions about the sustainability of current valuations in a slowing economy [2].

For ETFs, the implications are clear. Defensive strategies—such as ultra-short-term bond ETFs or hedging tools like the VIX Short-Term Futures ETF—have gained traction as investors seek stability [3]. However, even income-oriented ETFs like the First Trust STOXX European Select Dividend ETF (FDD) warrant a closer look.

FDD: Yield and Momentum in a Seasonal Crosshairs

FDD, which tracks high-dividend European equities, has attracted attention with a trailing 12-month yield of 6.18% and a year-to-date return of 23.79% [4]. These metrics position it as a compelling option for income-focused investors, especially amid the eurozone’s cooling inflation and attractive valuations in European markets [4]. However, a deeper dive into its fundamentals and technical indicators reveals a more nuanced picture.

Valuation metrics for FDD are mixed. While some sources report a P/E ratio of 10.74 and a P/B ratio of 0.96—suggesting relative undervaluation [5]—others cite higher averages of 14.25 (P/E) and 1.54 (P/B) [6]. Comparing these to industry benchmarks like the SPDR® Portfolio Europe ETF (SPEU, P/E 15.12) and the WisdomTree Europe Quality Dividend Growth Fund (EUDG, P/E 19.44) [7], FDD appears relatively inexpensive. Yet, low valuations alone do not guarantee outperformance, particularly in a sector where technical weaknesses can override fundamentals.

Technical Signals and the Case for Caution

FDD’s technical indicators present a cautionary tale. As of September 5, 2025, the ETF closed at $15.99, up 0.157% on the day but down 2.44% over the preceding 10 days [8]. The RSI hovers near neutrality at 50.29, while the MACD(12,26) has issued conflicting signals—a buy in the short term but a sell over the 3-month horizon [8]. Volume has also declined sharply, with a drop of 132,000 shares on the last trading day, signaling potential divergence between price action and investor sentiment [8].

These mixed signals align with broader seasonal trends. September’s historical volatility—marked by an 8.2% average rise in the VIX index since 1990 [9]—heightens the risk of abrupt reversals. For FDD, which is already in a “weak rising trend” [8], this volatility could exacerbate downside risks, particularly if the S&P 500 dips below its 200-day moving average—a threshold historically linked to September underperformance [1].

Strategic Caution: A Wait-and-Reassess Framework

Given these dynamics, a wait-and-reassess strategy emerges as prudent. While FDD’s yield and valuation offer short-term appeal, its technical fragility and the broader seasonal headwinds of September 2025 suggest deferring entry. Investors should monitor three key factors:
1. Valuation Alignment: If FDD’s P/E and P/B ratios converge with industry benchmarks (e.g., MSCI Europe’s P/E of 16.25) [10], it may signal improved fundamentals.
2. Technical Confirmation: A sustained break above $16.59—its projected 3-month price range upper bound [8]—could validate its upward trend.
3. Macro Conditions: A Fed pivot toward rate cuts or improved earnings revisions could mitigate September’s historical drag [11].

Conclusion

Seasonal risks in ETF performance are neither deterministic nor insurmountable. However, in 2025’s unique environment—marked by extended valuations, earnings uncertainty, and September’s historical volatility—strategic caution is warranted. For FDD, the interplay of attractive yields, mixed valuations, and weak technical signals underscores the need for a wait-and-reassess approach. Investors who delay entry until clearer alignment between fundamentals and technicals may find themselves better positioned to navigate the seasonal turbulence ahead.

Source:
[1] Seasonal weakness is a bigger risk this year - BlackRock [https://www.blackrock.com/us/financial-professionals/insights/seasonal-weakness]
[2] S&P 500 Seasonality Shows September as Weakest Month [https://www.investing.com/analysis/sp-500-seasonality-shows-september-as-weakest-month-but-trend-matters-more-200666084]
[3] September Effect and ETFs: What Lies Ahead for Investors? [https://finance.yahoo.com/news/september-effect-etfs-lies-ahead-142200197.html]
[4] First Trust STOXX European Select Dividend ETF (FDD) [https://www.nasdaq.com/articles/first-trust-stoxx-european-select-dividend-etf-fdd-strong-etf-right-now]
[5] First Trust STOXX® European Select Dividend Index Fund [https://www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=FDD]
[6] FDD | First Trust STOXX European Select Dividend Income [https://www.wsj.com/market-data/quotes/etf/FDD?gaa_at=eafs&gaa_n=ASWzDAglfat6oeg9sm1mZJ7SE_7aJ_TwbkPXNpUeTanOo-7Hz6EYivSsOHcn&gaa_sig=YkrDpg9_nylwWA96U2IoW-0SXk3J-wjHnXQi4sU0_sat2VE8T_QxbO6wmXJpb4a34JANoWnxe_uQ6ZdgbTwyIQ%3D%3D&gaa_ts=68bbb06e]
[7] EUDG - WisdomTree Europe Quality Dividend Growth Fund [https://www.wisdomtree.com/investments/etfs/equity/eudg]
[8] First Trust Stoxx European Select Dividend Index Fund ETF [https://stockinvest.us/stock/FDD]
[9] The September Effect—traditionally a month of market [https://www.reddit.com/r/fidelityinvestments/comments/1n6r539/the_september_effecttraditionally_a_month_of/]
[10] MSCI Europe Index (USD) [https://www.msci.com/www/index-factsheets/msci-europe-index/05836521]
[11] September 2025 Dashboard [https://www.etftrends.com/etf-strategist-channel/september-2025-dashboard-our-three-layers-risk-management/]