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January Effect Seems Likely: Buy Small-Cap ETFs & Stocks

After a bumpy ride in 2018 and a long list of woes, investors are concerned that the historical trend of “January Effect” will come into play this year. Notably, January Effect is a seasonal increase in stock prices largely due to year-end tax considerations. Investors re-deploy 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.

Large caps tend to perform better this month. Small-cap securities have historically proven their outperformance in January. According to Ed Matts, founder of Matrixtrade.com, the S&P 500 has risen 1.8% on average in January since 1950 compared with a gain of 0.7% in other months.

In fact, January effect is expected to bring the bulls back in the market this year.

January Effect Seems Real in 2019

Volatility, which was on the forefront and weighed on stock market returns last year, has spilled over into 2019. The U.S. stock market started 2019 with a bumpy ride due to a government shutdown, U.S.-China trade spat and concerns over the health of the world’s second largest economy and its effect on global economy.

However, it recovered strongly in the third trading session of the year, following robust job data and Powell’s comment that the Fed is not in a hurry to raise rates this year. The American economy has added stronger-than-expected 312,000 jobs in December — the biggest gain in 10 months — while unemployment jumped to 3.9%, the highest rate since August.

The small cap index, Russell 2000, has gained 5.8% in the year-to-date timeframe, outperforming the major indices by a wide margin. In comparison, S&P 500, Dow Jones and Nasdaq Composite Index have gained 2.7%, 2% and 3.9% respectively.

Strong labor market coupled with higher wages, increasing consumer spending and rising consumer confidence have accelerated growth of the economy. Notably, the American economy is on track to expand at the fastest pace in 13 years. Against such a backdrop where the economy is booming but global concerns remain an overhang, small caps seem to be the perfect choice.

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 a rally in the small-cap space.

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

Vanguard Russell 2000 ETF

This fund tracks the Russell 2000 Index

Zacks ETF Rank: #2
Expense Ratio: 0.15%
AUM: $1.4 billion
YTD Return: 6.0%

Vanguard Russell 2000 Growth Index ETF 

This ETF targets the growth segment of the broad small cap space and tracks the Russell 2000 Growth Index.

Zacks ETF Rank: #2
Expense Ratio: 0.20%
AUM: $251.3 million
YTD Return: 5.9%

SPDR Portfolio Small Cap ETF

This product offers diversified exposure to the U.S. small cap market segment and follows the SSGA Small Cap Index.

Zacks ETF Rank: #2
Expense Ratio: 0.05%
AUM: $1.1 billion
YTD Return: 5.9%

iShares Russell 2000 Growth ETF

This fund also tracks the Russell 2000 Growth Index and offers exposure to small-cap companies whose earnings are expected to grow at an above-average rate relative to the market.

Zacks ETF Rank: #2
Expense Ratio: 0.24%
AUM: $8.7 billion
YTD Return: 5.8%

Vanguard Russell 2000 Value ETF

This ETF offers exposure to the value corner of the small-cap space and follows the Russell 2000 Value Index.

Zacks ETF Rank: #2
Expense Ratio: 0.20%
AUM: $231.2 million
YTD Return: 5.8%

Navios Maritime Partners LP

This is an international owner and operator of dry cargo vessels engaged in seaborne transportation services of drybulk commodities including iron ore, coal, grains, fertilizers and chartering of its vessels under medium to long-term charters

Zacks Rank: #1
VGM Score: A
Market Cap: $197.8 million
Industry Rank: Top 42%
YTD Return: 38.9%

Jakks Pacific Inc.

This is a multi-line, multi-brand toy company that designs, develops, produces and markets toys and related products.

Zacks Rank: #2
VGM Score: B
Market Cap: $58.3 million
Industry Rank: Top 34%
YTD Return: 36%

Ladenburg Thalmann Financial Services Inc

This holding company is engaged in retail and institutional securities brokerage business and, through its subsidiary GBI Capital Partners, Inc. (formerly Gaines, Berland, Inc.,) provides investment banking and research services.

Zacks Rank: #2
VGM Score: A
Market Cap: $601.3 million
Industry Rank: Top 41%
YTD Return: 30%

inTest Corporation 

This is an independent designer, manufacturer and marketer of ATE interface solutions and temperature management products, which are used by semiconductor manufacturers to perform final testing of integrated circuits and wafers.

Zacks Rank: #2
VGM Score: A
Market Cap: $77.7 million
Industry Rank: Top 15%
YTD Return: 20.9%

U.S. Auto Parts Network Inc.

This is a leading online provider of automotive aftermarket parts, including body parts, engine parts, performance parts and accessories.

Zacks Rank: #2
VGM Score: A
Market Cap: $36.7 million
Industry Rank: Top 4%
YTD Return: 18.7%