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Has the January Effect Finally Taken Off? ETFs in Focus
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The January effect is a prominent and often-debated seasonal anomaly in the stock market, where stocks are believed to rise in the first month of the year. This phenomenon has hogged attention from investors and researchers alike due to its potential implications for market efficiency.
So far this January, Wall Street is relatively muted. But the S&P 500, the Nasdaq and the Russell 2000 have started this week with a bang, indicating that the January Effect has probably started to take shape.
Against this backdrop, investors can play ETFs like Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) , iShares U.S. Pharmaceuticals ETF (IHE - Free Report) , SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , VanEck Semiconductor ETF (SMH - Free Report) and Vanguard Small-Cap Value ETF (VBR - Free Report) as these funds have gained momentum.
Inside the January Effect
The concept of the January effect was first identified by investment banker Sidney Wachtel in 1942, as quoted on Investopedia. There are several reasons for the potential rally in stocks in January.
Tax-Loss Harvesting: One common explanation is that investors engage in tax-loss harvesting in December by selling losing stocks to offset capital gains and reduce tax liability. They subsequently repurchase these stocks in January, creating increased demand.
Year-End Cash Bonuses: Some investors use year-end cash bonuses to invest in the market in January, potentially contributing to the January effect.
Investor Psychology: Another theory suggests that January is perceived as an ideal time to begin an investment program or fulfill New Year's resolutions related to financial goals, influencing investor behavior.
Mutual Fund Managers' Actions: It has been proposed that mutual fund managers may buy top-performing stocks at year-end and divest losing assets to enhance their year-end reports, a practice known as "window dressing." However, this theory faces limitations.
December Effect: Researchers have even used the January effect as a basis to explore the existence of a complementary December effect, opening up new avenues for analysis.
Has 2024 witnessed January Effect?
Last week, Wall Street snapped its nine-week win streak, marking the end of their longest consecutive weekly run in the green since 2004. The Dow Jones and the S&P 500 had their worst start this year since 2016, per a Yahoo Finance article.
However, the losing trend was snapped on Monday this week as the Nasdaq soared 2% to lead market rally. Nvidia (NVDA - Free Report) saw its stock surge by over 6% following reports of the semiconductor company potentially releasing an AI chip tailored for the Chinese market in the second quarter of 2024.
In addition, cryptocurrency stocks experienced increased demand as the price of bitcoin (BTC-USD) surpassed $47,000, a level not seen since April 2022. This excitement stemmed from the possibility of an ETF for the world's largest digital currency being approved later this week.
Risk-on trade sentiments returned on the market. As of Jan 8, 2024, benchmark 10-year U.S. treasury yield was 4.01%, down from 4.05% recorded on Jan 5, 2024. Two-year U.S. treasury yield was 4.36%, down from 4.40% recorded on Jan 5, 2024.
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. The Russell 2000 Index declined 3.7% in the initial week of 2024. But iShares Russell 2000 ETF (IWM - Free Report) too added 1.8% on Jan 8, 2024.
Having said this, we would like to note that this pattern does not remain consistent annually, with several years experiencing minimal or even no January Effect. Recent years have seen a diminishing prominence of this phenomenon, primarily attributed to alterations in tax regulations and the greater utilization of tax-advantaged retirement accounts.
ETFs in Focus
Against this backdrop, below we highlight a few top-ranked ETFs that gained in the past two days (as of Jan 8, 2024).
Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) – Up 2.4% in the past two days
The underlying KBW Nasdaq Financial Sector Dividend Yield Index is a dividend yield weighted index seeking to reflect the performance of approximately 24 to 40 publicly listed financial companies engaged in the business of providing financial services and products, including banking, insurance and diversified financial services, in the United States. The fund has a Zacks Rank #2 (Buy).
iShares U.S. Pharmaceuticals ETF (IHE - Free Report) – Up 1.5% in the past two days
The underlying Dow Jones U.S. Select Pharmaceuticals Index is free-float adjusted market capitalization-weighted index. It includes pharmaceutical companies such as manufacturers of prescription or over-the-counter drugs or vaccines, but excludes producers of vitamins. The fund has a Zacks Rank #2.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) – Up 1.47% in the past two days
The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The fund has a Zacks Rank #2.
VanEck Semiconductor ETF (SMH - Free Report) – Up 4.2% in the past two days
The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund has a Zacks Rank #1.
Vanguard Small-Cap Value ETF (VBR - Free Report) – Up 1.58% in the past two days
The underlying CRSP U.S. Small Cap Value Index measures the investment return of small-capitalization value stocks. The fund has a Zacks Rank #1.
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Has the January Effect Finally Taken Off? ETFs in Focus
The January effect is a prominent and often-debated seasonal anomaly in the stock market, where stocks are believed to rise in the first month of the year. This phenomenon has hogged attention from investors and researchers alike due to its potential implications for market efficiency.
So far this January, Wall Street is relatively muted. But the S&P 500, the Nasdaq and the Russell 2000 have started this week with a bang, indicating that the January Effect has probably started to take shape.
Against this backdrop, investors can play ETFs like Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) , iShares U.S. Pharmaceuticals ETF (IHE - Free Report) , SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , VanEck Semiconductor ETF (SMH - Free Report) and Vanguard Small-Cap Value ETF (VBR - Free Report) as these funds have gained momentum.
Inside the January Effect
The concept of the January effect was first identified by investment banker Sidney Wachtel in 1942, as quoted on Investopedia. There are several reasons for the potential rally in stocks in January.
Tax-Loss Harvesting: One common explanation is that investors engage in tax-loss harvesting in December by selling losing stocks to offset capital gains and reduce tax liability. They subsequently repurchase these stocks in January, creating increased demand.
Year-End Cash Bonuses: Some investors use year-end cash bonuses to invest in the market in January, potentially contributing to the January effect.
Investor Psychology: Another theory suggests that January is perceived as an ideal time to begin an investment program or fulfill New Year's resolutions related to financial goals, influencing investor behavior.
Mutual Fund Managers' Actions: It has been proposed that mutual fund managers may buy top-performing stocks at year-end and divest losing assets to enhance their year-end reports, a practice known as "window dressing." However, this theory faces limitations.
December Effect: Researchers have even used the January effect as a basis to explore the existence of a complementary December effect, opening up new avenues for analysis.
Has 2024 witnessed January Effect?
Last week, Wall Street snapped its nine-week win streak, marking the end of their longest consecutive weekly run in the green since 2004. The Dow Jones and the S&P 500 had their worst start this year since 2016, per a Yahoo Finance article.
However, the losing trend was snapped on Monday this week as the Nasdaq soared 2% to lead market rally. Nvidia (NVDA - Free Report) saw its stock surge by over 6% following reports of the semiconductor company potentially releasing an AI chip tailored for the Chinese market in the second quarter of 2024.
In addition, cryptocurrency stocks experienced increased demand as the price of bitcoin (BTC-USD) surpassed $47,000, a level not seen since April 2022. This excitement stemmed from the possibility of an ETF for the world's largest digital currency being approved later this week.
Risk-on trade sentiments returned on the market. As of Jan 8, 2024, benchmark 10-year U.S. treasury yield was 4.01%, down from 4.05% recorded on Jan 5, 2024. Two-year U.S. treasury yield was 4.36%, down from 4.40% recorded on Jan 5, 2024.
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. The Russell 2000 Index declined 3.7% in the initial week of 2024. But iShares Russell 2000 ETF (IWM - Free Report) too added 1.8% on Jan 8, 2024.
Having said this, we would like to note that this pattern does not remain consistent annually, with several years experiencing minimal or even no January Effect. Recent years have seen a diminishing prominence of this phenomenon, primarily attributed to alterations in tax regulations and the greater utilization of tax-advantaged retirement accounts.
ETFs in Focus
Against this backdrop, below we highlight a few top-ranked ETFs that gained in the past two days (as of Jan 8, 2024).
Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report) – Up 2.4% in the past two days
The underlying KBW Nasdaq Financial Sector Dividend Yield Index is a dividend yield weighted index seeking to reflect the performance of approximately 24 to 40 publicly listed financial companies engaged in the business of providing financial services and products, including banking, insurance and diversified financial services, in the United States. The fund has a Zacks Rank #2 (Buy).
iShares U.S. Pharmaceuticals ETF (IHE - Free Report) – Up 1.5% in the past two days
The underlying Dow Jones U.S. Select Pharmaceuticals Index is free-float adjusted market capitalization-weighted index. It includes pharmaceutical companies such as manufacturers of prescription or over-the-counter drugs or vaccines, but excludes producers of vitamins. The fund has a Zacks Rank #2.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) – Up 1.47% in the past two days
The underlying S&P 500 High Dividend Index is designed to measure the performance of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield. The fund has a Zacks Rank #2.
VanEck Semiconductor ETF (SMH - Free Report) – Up 4.2% in the past two days
The underlying MVIS US Listed Semiconductor 25 Index tracks the overall performance of companies involved in semiconductor production and equipment. The fund has a Zacks Rank #1.
Vanguard Small-Cap Value ETF (VBR - Free Report) – Up 1.58% in the past two days
The underlying CRSP U.S. Small Cap Value Index measures the investment return of small-capitalization value stocks. The fund has a Zacks Rank #1.