Though investors do not universally agree on the existence of the January Effect, there is at least in theory a phenomenon in which small-cap stocks may rise at the start of the year after investors have sold off losing stocks late in the prior year to offset capital gains. When they then repurchase shares in January, the theory holds, these stocks may see a boost.
For investors interested in small-cap stocks, historical January market trends may be just an added bonus. After all, small-caps tend to carry potential for outsized returns (although, at the same time, they are typically riskier than larger, better-established firms as well).
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Small-cap exchange-traded funds (ETFs) are a popular way to mitigate some of this risk through a diversified basket of small-cap names. With the start of a new year, a seasonal ETF strategy may include a shift toward small-cap funds in an effort to capitalize on potential fresh momentum. Here are three widely followed funds that approach “small-cap exposure” from very different angles.
The Dimensional International Small Cap Value ETF (BATS: DISV) targets non-U.S. small-cap stocks from developed markets, assessed by fund managers to have comparably low prices.
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The fund is actively managed in a bid to ensure responsiveness to shifting market conditions, to avoid sector biases, and to maintain control over the portfolio.
Investors should expect to pay a small premium for this active management—DISV has an expense ratio of 0.42%, making it somewhat more costly than many small-cap alternatives with an index-linked approach.
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For the extra fee, investors get access to a curated portfolio of some 1,500 small-cap names from around the world.
The portfolio is broadly diversified, although the top 50 positions do account for roughly a quarter of all invested assets. Investors may be more willing to accept a higher expense ratio relative to other small-cap ETFs when considering DISV’s history of returns: the fund has returned nearly 47% year-to-date (YTD), significantly outpacing the performance of the S&P 500 more broadly—and of popular and inexpensive small-cap funds like the iShares Core S&P Small-Cap ETF (NYSEARCA: IJR), which is up not even 9% over the same period.
