Ride The January Effect With These ETFs And Stocks
January is usually a pretty strong month for stocks, suggesting that many could see large gains to start the year if historical trends hold true yet again. This is largely attributed to the ‘January Effect’. What is the January Effect? The January Effect is a historically observed increase in stock prices in the month of January due largely to year-end tax considerations. It is a seasonal anomaly in which investors redeploy their capital in the stock market in January after a sell-off 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 continuing to outperform their large-cap cousins. January Effect Never Looked More Good While most of the developed and developing economies are now struggling to reinvigorate growth and fighting deflation in this fear-ridden world, the U.S. economy is growing at a faster rate not seen in more than a decade. Given this, small caps seem to be the perfect choice in the present scenario where the American economy is way ahead of the others. This is because these pint-sized stocks are closely tied to the U.S. economy and generate most of their revenues from the domestic market making them great choices in a trending U.S. market. Further, these companies are small and are poised to grow higher than their already tapped out large-cap counterparts. These fundamentals will support the surge in the small-cap space going forward and the outperformance is likely to be more evident in the first month of the year if history is any guide. For investors seeking to capitalize on the opportunity of the January Effect in basket form, the following small-cap ETFs and stocks could be solid pure play choices if it materializes in 2015. ETFs to Consider While there are several options in the small-cap ETF space, we have highlighted those that have gained strong momentum last month and this trend is likely to continue in the first month of 2015 given their favorable Zacks ETF Rank of 3 or ‘Hold’ rating. iShares Micro-Cap ETF (NYSEARCA: IWC ) This ETF tracks the Russell Microcap Index, holding a large basket of 1,426 mini securities. The fund is widely diversified across each security as none of them holds more than 0.87% of total assets. From a sector look, financials and health care take the top two spots with 25.4% and 23.9% share, respectively, while information technology, consumer discretionary and industrials round off the top five. The fund has amassed $973.5 million in its asset base and trades in volume of less than million shares per day. The ETF charges 60 bps in annual fees and gained nearly 5% over the past one month. First Trust Small Cap Core AlphaDEX ETF (NYSEARCA: FYX ) This fund follows an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25% of the stocks. This approach results in a basket of 448 stocks that are well spread out across each security with none holding more than 0.56% of assets. Sector wise, the product is highly diversified with industrials, information technology and financials making up for the top three sectors. FYX is rich in AUM of $600.5 million and sees moderate volume of around 72,000 shares a day. Expense ratio came in at 0.66% and the ETF is up 4.2% over the past month. RevenueShares Small Cap ETF (NYSEARCA: RWJ ) This product tracks the RevenueShares Small Cap Index and offers exposure to about 600 stocks that are weighted by revenues instead of market capitalization. SYNNEX Corp. (NYSE: SNX ) occupies the top position at 2.13% in the basket, while other firms hold less than 1.50% of assets. In terms of industrial exposure, consumer discretionary and industrials are the top two sectors at 23.8% and 21.2%, respectively, closely followed by consumer staples (18.1%). The fund has amassed $325.1 million in its asset base, while it charges 54 bps in fees per year from investors. Volume is light coming under 28,000 shares a day on an average. The ETF added 4.1% in the last month. Stocks to Consider In the stock world, it is difficult to identify the stocks that will outperform in 2015. As such, we have screened for a number of criteria with the help of our Zacks Screener and have emerged with a handful of great picks for January. The eligible benchmarks include a Zacks Rank # 3 (Hold) or better, positive industry Zacks Rank, upward earnings estimate revisions and above-average returns in the last month. Bio-Reference Laboratories Inc. (NASDAQ: BRLI ) Based in Elmwood Park, NJ, Bio-Reference Laboratories is the third largest full service clinical diagnostic laboratory in the U.S. providing testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area. The company has seen rising earnings estimates by 4.4% for 2014 over the past one month. The stock gained 12.7% last month and has a Zacks Rank #1. It comes under an industry that has a solid Zacks Industry rank in the top 33%, suggesting their outperformance in the coming weeks. Moelis & Company (NYSE: MC ) Based in New York, Moelis & Company is a leading global independent investment bank offering strategic and financial advisory services in the United States and internationally. The company has seen positive earnings estimate revision of 3.5% for 2014 over the past one month. The stock gained over 4% last month and is expected to continue to rise given that it has a Zacks Rank #2 and an industry Rank in the top 23%. Regis Corp. (NYSE: RGS ) Based in Edina, MN, Regis Corp. is the beauty industry’s global leader in beauty salons, hair restoration centers, and cosmetology education. It is the owner, operator, and franchiser of hairstyling and hair care salons for men, women, and children in the United States, the United Kingdom, Canada, and Puerto Rico. The company sees impressive earnings estimate revisions of 20% for 2014. It added 2% last month and has a Zacks Rank #3 with a strong industry Zacks Rank in the top 12%. Bottom Line January is truly the time to get in on small-cap securities, assuming that the historical trend holds true in 2015. The above-mentioned ETFs and stocks have outperformed the broader market by a wide margin last month. This trend is likely to continue with an improving economy and a booming stock market that has boosted the appeal of these pint-sized products.