January is usually a pretty strong month for stocks, suggesting that many could see large gains in the first month of the year if historical trends hold true. This is largely attributed to the “January Effect.”

What is 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.

While large caps tend to perform better, small-cap securities have historically proven their outperformance in January. According to some market experts, the January Effect actually runs from mid December through February, with the small caps continuing to outperform their large-cap cousins.

January Effect Looks Real This Year

Though worries over the prolonged coronavirus crisis and runoff elections for two Senate seats in Georgia led to a worst start to 2021 in five years, the combination of factors including vaccine rollout and super easy policies will continue to charge the bulls.
    
The wider reach of coronavirus vaccine is expected to the end of the pandemic resulting in higher demand for all types of products and services in the economy. As small-cap companies are closely tied to the U.S. economy, these are poised to outperform when the economy improves. These pint-sized stocks generate most of their revenues from the domestic market, making them great choices during an uptrend (read: Small-Cap ETFs Face Off: IWM Vs. IJR).

Additionally, the super-easy monetary policy has been driving the small-cap rally. Fed pledged to hold rates near zero and will continue the asset purchase program at the current rate until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. A low interest rate bodes well for small-cap stocks as it pushes up economic activities and results in higher spending, thus boosting domestically focused companies.

The combination of factors will provide support to the January Effect, leading to a rally in the small-cap space.

For investors seeking to capitalize on this opportunity, the following small-cap ETFs and stocks could be solid pure plays. All these have a solid Zacks Rank #1 (Strong Buy) or 2 (Buy).

Vanguard Small-Cap Growth ETF (VBK Quick QuoteVBK - Free Report)

This fund follows the CRSP US Small Cap Growth Index.

Zacks ETF Rank: #1
Expense Ratio: 0.07%
AUM: $14.4 billion

iShares Russell 2000 Growth ETF (IWO Quick QuoteIWO - Free Report)

This fund tracks the Russell 2000 Growth Index and offers exposure to small-cap companies that have earnings growth expectations above average rate relative to the market (read: 4 Best-Performing Small-Cap Growth ETFs in 2020).

Zacks ETF Rank: #1
Expense Ratio: 0.24%
AUM: $11.8 billion

iShares S&P Small-Cap 600 Growth ETF (IJT Quick QuoteIJT - Free Report)

This product tracks the S&P SmallCap 600 Growth Index.

Zacks ETF Rank: #2
Expense Ratio: 0.18%
AUM: $5.2 billion

SPDR S&P 600 Small Cap Growth ETF (SLYG Quick QuoteSLYG - Free Report)
 
This ETF follows the S&P Small-Cap 600 Growth Index, which comprises stocks that exhibit the strongest growth characteristics based on sales growth, earnings change to price and momentum.

Zacks ETF Rank: #2
Expense Ratio: 0.15%
AUM: $1.9 billion

iShares Morningstar Small-Cap Growth ETF

This product follows the Morningstar Small Growth Index (read: 5 Best Small-Cap ETFs as Russell 2000 Tops S&P 500 YTD).

Zacks ETF Rank: #2
Expense Ratio: 0.30%
AUM: $698.2 million

Liquidity Services Inc. (LQDT Quick QuoteLQDT - Free Report)
 
This company employs innovative e-commerce marketplace solutions to manage, value and sell inventory and equipment for business and government clients.

Zacks Rank: #2
Growth Score: A
Market Cap: $555.3 million
Industry Rank: Top 7%

Bassett Furniture Industries Incorporated (BSET Quick QuoteBSET - Free Report)

It is a leading manufacturer and marketer of high quality, mid-priced home furnishings.

Zacks Rank: #1
Growth Score: A
Market Cap: $191.1 million
Industry Rank: Top 6%

You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports Inc.

It is a major athletic-inspired retailer, located in small and mid-sized markets across the country.

Zacks Rank: #1
Growth Score: A
Market Cap: $761 million
Industry Rank: Top 6%

Titan Machinery Inc. (TITN Quick QuoteTITN - Free Report)

This company owns and operates a network of full-service agricultural and construction equipment stores (read: 6 Predictions for the ETF World in 2021).

Zacks Rank: #1
Growth Score: A
Market Cap: $427.2 million
Industry Rank: Top 14%

Gogo Inc. (GOGO Quick QuoteGOGO - Free Report)

It is the leading provider of in-flight connectivity and wireless entertainment solutions for the global aviation industry.

Zacks Rank: #2
Growth Score: A
Market Cap: $815.8 million
Industry Rank: Top 14%

Bottom Line

January is truly the time to get in on small-cap securities with the above-mentioned ETFs and stocks, assuming that the historical trend holds true in 2021. A vaccine and massive money flows have also boosted the appeal of these pint-sized products.

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