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After registering big annual gains in 2023, Wall Street is poised to gain from the historical trend of “January Effect.” While large caps tend to perform better, small-cap securities have historically proven their outperformance in January.
For investors seeking to capitalize on this opportunity, small-cap ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ iShares Russell 2000 ETF (IWM - Free Report) , Vanguard Small-Cap ETF (VB - Free Report) , Schwab U.S. Small-Cap ETF (SCHA - Free Report) and SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report) could be solid pure plays. All these have a solid Zacks ETF Rank #2 (Buy).
What is the January Effect?
January Effect is a seasonal increase in stock prices due largely to year-end tax considerations. Investors redeploy their capital to speculate on weaker performers in January after selling winners in December to create tax losses. This phenomenon pushes the stock market higher in the first month of the year (read: 5 Sector ETFs That Beat the Market in 2023).
According to some market experts, the January Effect actually runs from mid-December through February, with small-caps continuing to outperform their large-cap cousins.
January Effect Seems Real
The positive momentum in the stock market is expected to continue, given the Fed’s dovish outlook and improving economic growth. The central bank penciled in three rate cuts for 2024 as inflation is easing and the economy is holding up better. This shift in its monetary policy approach aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.
Meanwhile, recent indicators suggest that economic activity has been expanding at a moderate pace, buoyed by robust consumer spending, strong job gains and a low unemployment rate. Corporate earnings have also improved. The S&P 500 index witnessed earnings growth in the third quarter after three back-to-back quarters of decline (read: 5 Best Top-Ranked ETFs of 2023 Set to Soar in 2024).
Though U.S. stocks have become overbought after a marvelous surge in 2023, the S&P 500 is still a few fractions away from the peak. However, the Dow Jones climbed to record highs and the tech-heavy Nasdaq Composite Index registered the best annual performance since 2020.
iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. iShares Core S&P Small-Cap ETF holds 665 stocks in its basket, with none accounting for more than 2% of the assets. Financials, industrials, consumer discretionary, information technology and healthcare are the top five sectors with double-digit exposure each.
iShares Core S&P Small-Cap ETF has AUM of $77.9 billion and trades in an average daily volume of 5 million shares. The product charges investors 6 bps in annual fees.
iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $68.4 billion and an average daily volume of 39 million shares. It holds well-diversified 1,973 stocks in its basket and has key holdings in industrials, financials, healthcare, information technology and consumer discretionary.
iShares Russell 2000 ETF charges 19 bps in annual fees.
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,422 stocks, with none holding more than 0.4% of assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five.
Vanguard Small-Cap ETF has AUM of $51 billion and trades in a solid average daily volume of about 838,000 shares. VB charges 5 bps in fees per year from investors (read: Are Small-Cap ETFs Poised to Surge in 2024?).
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,744 stocks in its basket. Each security accounts for less than 0.3% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors, with industrials, financials, health care, information technology and consumer discretionary having double-digit exposure each.
Schwab U.S. Small-Cap ETF has AUM of $16 billion and sees a solid volume of around 1.1 million shares a day. It has an expense ratio of 0.04%.
SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 606 stocks in its basket. None of the firms make up more than 0.7% of the assets. SPDR Portfolio S&P 600 Small Cap ETF is also widely spread out across sectors with financials, industrials, consumer discretionary, information technology and healthcare having double-digit exposure each.
SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $10 billion in its asset base and trades in a good volume of 1.7 million shares a day on average. SPSM charges 3 bps in annual fees.
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5 Small-Cap ETFs to Play the January Effect
After registering big annual gains in 2023, Wall Street is poised to gain from the historical trend of “January Effect.” While large caps tend to perform better, small-cap securities have historically proven their outperformance in January.
For investors seeking to capitalize on this opportunity, small-cap ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ iShares Russell 2000 ETF (IWM - Free Report) , Vanguard Small-Cap ETF (VB - Free Report) , Schwab U.S. Small-Cap ETF (SCHA - Free Report) and SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report) could be solid pure plays. All these have a solid Zacks ETF Rank #2 (Buy).
What is the January Effect?
January Effect is a seasonal increase in stock prices due largely to year-end tax considerations. Investors redeploy their capital to speculate on weaker performers in January after selling winners in December to create tax losses. This phenomenon pushes the stock market higher in the first month of the year (read: 5 Sector ETFs That Beat the Market in 2023).
According to some market experts, the January Effect actually runs from mid-December through February, with small-caps continuing to outperform their large-cap cousins.
January Effect Seems Real
The positive momentum in the stock market is expected to continue, given the Fed’s dovish outlook and improving economic growth. The central bank penciled in three rate cuts for 2024 as inflation is easing and the economy is holding up better. This shift in its monetary policy approach aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.
Meanwhile, recent indicators suggest that economic activity has been expanding at a moderate pace, buoyed by robust consumer spending, strong job gains and a low unemployment rate. Corporate earnings have also improved. The S&P 500 index witnessed earnings growth in the third quarter after three back-to-back quarters of decline (read: 5 Best Top-Ranked ETFs of 2023 Set to Soar in 2024).
Though U.S. stocks have become overbought after a marvelous surge in 2023, the S&P 500 is still a few fractions away from the peak. However, the Dow Jones climbed to record highs and the tech-heavy Nasdaq Composite Index registered the best annual performance since 2020.
ETFs to Buy
We have profiled the abovementioned ETFs here:
iShares Core S&P Small-Cap ETF (IJR - Free Report)
iShares Core S&P Small-Cap ETF offers exposure to U.S. small-cap stocks and follows the S&P SmallCap 600 Index. iShares Core S&P Small-Cap ETF holds 665 stocks in its basket, with none accounting for more than 2% of the assets. Financials, industrials, consumer discretionary, information technology and healthcare are the top five sectors with double-digit exposure each.
iShares Core S&P Small-Cap ETF has AUM of $77.9 billion and trades in an average daily volume of 5 million shares. The product charges investors 6 bps in annual fees.
iShares Russell 2000 ETF (IWM - Free Report)
iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $68.4 billion and an average daily volume of 39 million shares. It holds well-diversified 1,973 stocks in its basket and has key holdings in industrials, financials, healthcare, information technology and consumer discretionary.
iShares Russell 2000 ETF charges 19 bps in annual fees.
Vanguard Small-Cap ETF (VB - Free Report)
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,422 stocks, with none holding more than 0.4% of assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, consumer discretionary, financials, information technology and healthcare being the top five.
Vanguard Small-Cap ETF has AUM of $51 billion and trades in a solid average daily volume of about 838,000 shares. VB charges 5 bps in fees per year from investors (read: Are Small-Cap ETFs Poised to Surge in 2024?).
Schwab U.S. Small-Cap ETF (SCHA - Free Report)
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,744 stocks in its basket. Each security accounts for less than 0.3% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors, with industrials, financials, health care, information technology and consumer discretionary having double-digit exposure each.
Schwab U.S. Small-Cap ETF has AUM of $16 billion and sees a solid volume of around 1.1 million shares a day. It has an expense ratio of 0.04%.
SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report)
SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 606 stocks in its basket. None of the firms make up more than 0.7% of the assets. SPDR Portfolio S&P 600 Small Cap ETF is also widely spread out across sectors with financials, industrials, consumer discretionary, information technology and healthcare having double-digit exposure each.
SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $10 billion in its asset base and trades in a good volume of 1.7 million shares a day on average. SPSM charges 3 bps in annual fees.