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Top-Ranked ETFs & Stocks to Profit From the January Effect

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After registering the strongest year since 2013, Wall Street is poised to gain from the historical trend of “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 outperforming their large-cap cousins (read: Top-Ranked Small-Cap ETFs to Buy for 2020).  

January Effect Looks More Real This Year

Sentiments have been super bullish as we entered 2020. Trade deal optimism, a dovish Fed and a resilient economy have been the biggest catalysts. President Donald Trump is expected to sign a long-awaited phase one trade deal with China on Jan 15 that would reduce tensions between the world’s two superpowers. U.S. Trade Representative Robert Lighthizer stated that the deal will boost U.S. exports to China by $100 billion in 2021, nearly double from the current levels.

The central bank slashed interest rates three times last year to sustain a decade-long economic expansion. Lower interest rates bode well for the small-cap stocks, perking up economic activities and resulting in higher spending, thus boosting domestically focused companies.

The U.S. economy is on a strong growth path with job additions at the fastest pace last year, unemployment dropping to the lowest level since 1969 and third-quarter 2019 GDP growth being revised upward from 1.9% to 2.1%. The housing market is also clearly showing signs of a strong recovery as lower mortgage rates and slower home price growth are acting as catalysts. In another strong signal, the Federal Reserve Bank of New York’s survey measure of general business conditions in the next six months jumped to a five-month high (read: 9 ETFs at the Forefront of 2019 Market Rally).  

Against such a backdrop, small caps seem to be the perfect choice as these are closely tied to the U.S. economy and do not have much exposure to the international market. These pint-sized stocks generate most of their revenues from the domestic market, making them great choices during an uptrend. Further, these companies are small and poised to grow higher than their already tapped out large-cap counterparts. These fundamentals will provide support to the January Effect, leading to rally in the small-cap space (read: all Small Cap ETFs here).

If these weren’t enough, flaring tensions in the Middle East following a U.S. airstrike in Baghdad will benefit small caps, which are well insulated from the international headwinds.

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

iShares Russell 2000 Growth ETF (IWO - Free Report)

This fund also 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.

Zacks ETF Rank: #1
Expense Ratio: 0.24%
AUM: $9.8 billion

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

This fund follows the CRSP US Small Cap Growth Index.

Zacks ETF Rank: #2
Expense Ratio: 0.07%
AUM: $9.8 billion

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

This product tracks the S&P SmallCap 600 Growth Index (read: Bet on Growth Investing Now: Top-Ranked ETFs & Stocks).

Zacks ETF Rank: #2
Expense Ratio: 0.25%
AUM: $5.5 billion

SPDR S&P 600 Small Cap Growth ETF (SLYG - 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: $2 billion

Vanguard S&P Small-Cap 600 Growth ETF (VIOG - Free Report)

This product follows the S&P Small-Cap 600 Growth Index

Zacks ETF Rank: #2
Expense Ratio: 0.16%
AUM: $406.5 million

VirTra Systems Inc.

This company develops, manufactures, markets, and sells personal computer and non-personal computer-based products for training/simulation and advertising/promotion markets.

Zacks Rank: #1
Growth Score: A
Market Cap: $37.7 million
Industry Rank: Top 1%

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

Malibu Boats Inc. (MBUU - Free Report)

This company operates as a designer, manufacturer and marketer of sport boats primarily in the United States.

Zacks Rank: #2
Growth Score: A
Market Cap: $838 million
Industry Rank: Top 3%

Group 1 Automotive, Inc. (GPI - Free Report)

It is one of the leading automotive retailers in the world.

Zacks Rank: #2
Growth Score:  B
Market Cap: $1.9 billion
Industry Rank: Top 3%

Office Depot Inc. (ODP - Free Report)

This company provides business services and supplies, products and technology solutions.

Zacks Rank: #2
Growth Score: A
Market Cap: $1.50 billion
Industry Rank: Top 4%

NeoPhotonics Corporation (NPTN - Free Report)

It is engaged in the design and manufacture of photonic integrated circuit, or PIC, based modules and subsystems for bandwidth-intensive, high-speed communications networks (read: Semiconductor Outperforms in 2019: 5 Best ETFs & Stocks).

Zacks Rank: #1
Growth Score: A
Market Cap: $425.5 million
Industry Rank: Top 5%

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 2020. An improving economy and a booming stock market have also boosted the appeal of these pint-sized products.

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