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5 Small-Cap ETFs to Profit From the January Effect
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After registering double-digit annual growth, 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 (read: Best Performing ETFs of 2021).
For investors seeking to capitalize on this opportunity, small-cap ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ Vanguard Small-Cap ETF (VB - Free Report) , Schwab U.S. Small-Cap ETF (SCHA - Free Report) , Vanguard Small Cap Growth ETF (VBK - Free Report) and iShares Russell 2000 Growth ETF (IWO - Free Report) could be solid pure plays. All these have a solid Zacks Rank #2 (Buy).
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.
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
Despite skyrocketing inflation, raging COVID-19 cases and reduced fiscal stimulus, improving economy, rising consumer confidence, a massive vaccination drive and solid corporate earnings are likely to charge bulls. In fact, the Dow Jones started 2022 on a high note, hitting new peaks for the consecutive first two days of the year.
Although Treasury yields rose on the Fed tightening policy, it reflects a solid economy, which bodes well for the small caps. 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: Treasury Yields Jump to Start New Year: ETFs to Play).
U.S. consumer confidence rose further in December, suggesting that the economy would continue to expand in 2022. Meanwhile, President Biden’s administration took steps to eliminate supply-chain bottlenecks, indicating that higher inflation will not last very long.
Further, the Food and Drug Administration recently granted approval for oral antiviral COVID-19 pills to Pfizer (PFE - Free Report) and Merck (MRK - Free Report) , making them the first and second at-home treatments, respectively, for coronavirus and a potentially important tool in the fight against the fast-spreading Omicron variant.
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 684 stocks in its basket with none accounting for more than 1.3% of assets. Financials, industrials, information technology, healthcare and consumer discretionary are the top five sectors with double-digit exposure each.
iShares Core S&P Small-Cap ETF has AUM of $75.6 billion and trades in an average daily volume of 3.9 million shares. The product charges investors 6 bps in annual fees.
Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1560 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 $50.2 billion and trades in a solid average daily volume of about 621,000 shares. VB charges 5 bps in fees per year from investors.
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,809 stocks in its basket. Each security accounts for less than 0.5% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer discretionary having double-digit exposure each.
Vanguard Small Cap Growth ETF targets the growth segment of the small-cap space and follows the CRSP US Small Cap Growth Index. It holds 728 stocks in its basket with each accounting for less than 1% of assets. Vanguard Small Cap Growth ETF has key holdings in technology, healthcare, industrials, and consumer discretionary.
Vanguard Small Cap Growth ETF has amassed $16.4 billion and charges 7 bps annual fees. The product trades in an average daily volume of 254,000 shares.
iShares Russell 2000 Growth ETF also offers exposure to the growth segment of the small-cap space. It tracks the Russell 2000 Growth Index, holding 1243 stocks with each making up for less than 0.8% shares. iShares Russell 2000 Growth ETF has key holdings in technology, healthcare, industrials, and consumer discretionary.
iShares Russell 2000 Growth ETF has AUM of $12.4 billion and charges 24 bps in annual fees from investors. It trades in volume of 664,000 shares per day on average.
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5 Small-Cap ETFs to Profit From the January Effect
After registering double-digit annual growth, 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 (read: Best Performing ETFs of 2021).
For investors seeking to capitalize on this opportunity, small-cap ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ Vanguard Small-Cap ETF (VB - Free Report) , Schwab U.S. Small-Cap ETF (SCHA - Free Report) , Vanguard Small Cap Growth ETF (VBK - Free Report) and iShares Russell 2000 Growth ETF (IWO - Free Report) could be solid pure plays. All these have a solid Zacks Rank #2 (Buy).
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.
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
Despite skyrocketing inflation, raging COVID-19 cases and reduced fiscal stimulus, improving economy, rising consumer confidence, a massive vaccination drive and solid corporate earnings are likely to charge bulls. In fact, the Dow Jones started 2022 on a high note, hitting new peaks for the consecutive first two days of the year.
Although Treasury yields rose on the Fed tightening policy, it reflects a solid economy, which bodes well for the small caps. 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: Treasury Yields Jump to Start New Year: ETFs to Play).
U.S. consumer confidence rose further in December, suggesting that the economy would continue to expand in 2022. Meanwhile, President Biden’s administration took steps to eliminate supply-chain bottlenecks, indicating that higher inflation will not last very long.
Further, the Food and Drug Administration recently granted approval for oral antiviral COVID-19 pills to Pfizer (PFE - Free Report) and Merck (MRK - Free Report) , making them the first and second at-home treatments, respectively, for coronavirus and a potentially important tool in the fight against the fast-spreading Omicron variant.
ETFs to Buy
We have profiled the above-mentioned 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 684 stocks in its basket with none accounting for more than 1.3% of assets. Financials, industrials, information technology, healthcare and consumer discretionary are the top five sectors with double-digit exposure each.
iShares Core S&P Small-Cap ETF has AUM of $75.6 billion and trades in an average daily volume of 3.9 million shares. The product charges investors 6 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 1560 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 $50.2 billion and trades in a solid average daily volume of about 621,000 shares. VB charges 5 bps in fees per year from investors.
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 1,809 stocks in its basket. Each security accounts for less than 0.5% of the assets. Schwab U.S. Small-Cap ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer discretionary having double-digit exposure each.
Schwab U.S. Small-Cap ETF has AUM of $17.1 billion and sees a solid volume of around 508,000 shares a day. It has an expense ratio of 0.04% (read: Are Small Caps the Best Bets for 2022? ETFs in Focus).
Vanguard Small Cap Growth ETF (VBK - Free Report)
Vanguard Small Cap Growth ETF targets the growth segment of the small-cap space and follows the CRSP US Small Cap Growth Index. It holds 728 stocks in its basket with each accounting for less than 1% of assets. Vanguard Small Cap Growth ETF has key holdings in technology, healthcare, industrials, and consumer discretionary.
Vanguard Small Cap Growth ETF has amassed $16.4 billion and charges 7 bps annual fees. The product trades in an average daily volume of 254,000 shares.
iShares Russell 2000 Growth ETF (IWO - Free Report)
iShares Russell 2000 Growth ETF also offers exposure to the growth segment of the small-cap space. It tracks the Russell 2000 Growth Index, holding 1243 stocks with each making up for less than 0.8% shares. iShares Russell 2000 Growth ETF has key holdings in technology, healthcare, industrials, and consumer discretionary.
iShares Russell 2000 Growth ETF has AUM of $12.4 billion and charges 24 bps in annual fees from investors. It trades in volume of 664,000 shares per day on average.