5 Top-Ranked Small-Cap ETFs To Buy For The January Effect

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After the biggest annual loss since 2008, Wall Street staged the first big rally of 2023 on hopes of easing inflation and the Fed’s slower rate hike path. The strong trend is likely to continue given the historical trend of the “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) ¸ Vanguard Small-Cap ETF (VB - Free Report), Schwab U.S. Small-Cap ETF (SCHA - Free Report), Vanguard Russell 2000 ETF (VTWO - 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 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

Inflation is easing and consumer confidence is rising, reflecting that the stock market will likely move higher. The consumer price index jumped 7.1% year over year in November, down from a 7.7% year-over-year increase in October and a recent peak of 9.1% in June. This represents the lowest annual increase since late 2021.

Americans have regained confidence in the U.S. economy, with consumer confidence bouncing back in December and reversing consecutive declines in October and November to reach its highest level since April, per the University of Michigan's Consumer Confidence Index. The Conference Board Consumer Confidence Index also climbed to 108.3 from 101.4 in November.

The latest job report has added to the strength. The U.S. added 223,000 jobs in December and the unemployment rate fell to 3.5%, matching a 50-decade low. However, wage growth lost momentum, which gave investors hope that the Fed can ease off on its interest-rate increases. All these factors will lift the stocks higher.


ETFs to Buy

We have profiled the above-mentioned ETFs here:

iShares Core S&P Small-Cap ETF (IJR)

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 681 stocks in its basket, with none accounting for more than 1.9% of 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 $65.5 billion and trades in an average daily volume of 4 million shares. The product charges investors 6 bps in annual fees.

Vanguard Small-Cap ETF (VB)

Vanguard Small-Cap ETF follows the CRSP US Small Cap Index and holds a basket of 1,498 stocks, with none holding more than 0.4% of assets. Vanguard Small-Cap ETF is widely spread across various sectors, with industrials, financials, consumer discretionary, healthcare and information technology being the top five.

Vanguard Small-Cap ETF has AUM of $41 billion and trades in a solid average daily volume of about 759,000 shares. VB charges 5 bps in fees per year from investors.

Schwab U.S. Small-Cap ETF (SCHA)
 
Schwab U.S. Small-Cap ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market Index, holding 1,765 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 financials, industrials, health care, information technology and consumer discretionary having double-digit exposure each.

Schwab U.S. Small-Cap ETF has AUM of $13.5 billion and sees a solid volume of around 1.1 million shares a day. It has an expense ratio of 0.04%.

Vanguard Russell 2000 ETF (VTWO)

Vanguard Russell 2000 ETF tracks the Russell 2000 Index, holding 1967 stocks in its basket with none making up for more than 0.4% of the assets. Vanguard Russell 2000 ETF is widely spread across various sectors, with financials, industrials, healthcare, consumer discretionary, and information technology being the top five.

Vanguard Russell 2000 ETF has accumulated $5.4 billion in its asset base and trades in an average daily volume of 1.3 million shares. The product charges 10 bps in annual fees.

SPDR Portfolio S&P 600 Small Cap ETF (SPSM)

SPDR Portfolio S&P 600 Small Cap ETF follows the S&P Small Cap 600 Index, holding 607 stocks in its basket. None of the firms make up for more than 0.7% of 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 making double-digit exposure each.

SPDR Portfolio S&P 600 Small Cap ETF has been able to manage $4.6 billion in its asset base and trades in a good volume of 833,000 shares a day on average. SPSM charges 5 bps in annual fees.


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