Wall Street pays attention to the month of January as a potential predictor of equity returns for the remainder of the year. According to the concept known as the "January effect," stocks, especially small-capitalization (cap) shares, typically perform well in January.
A large body of work by both academics and market practitioners highlights that there might be several reasons behind this seasonality. They include portfolio rebalancing by managers and end-of-year tax preparation by retail investors. Meanwhile, some commentators suggest that we're now witnessing the start of “January effect” earlier, beginning in December.
Forecasting how January 2022 might fare for equities is not easy and beyond the scope of this article. But those investors who would like to participate in such a potential seasonal move might look at small-cap stocks as well as exchange-traded funds (ETFs).
Regular followers of this column know that we regularly cover small-cap ETFs. Today's article introduces two more such funds.
We should remind investors that the definition of a small-cap company usually differs between countries or even brokers. In addition, a large number of ETFs that focus on small-caps include mid-caps as well. With that information in mind, here are today's two funds:
1.The Vanguard Small-Cap Growth ETF
- Current Price: $279.83
- 52-Week Range: $255.22 - $306.78
- Dividend Yield: 0.36%
- Expense Ratio: 0.07% per year
Our first fund, the Vanguard Small-Cap Growth Index Fund ETF Shares (NYSE:VBK), currently invests in 728 small-cap US stocks. It started trading in January 2004.
VBK tracks the CRSP US Small Cap Growth index. The 10 largest names constitute 7% of net assets of $36.3 billion. Technology and health care sectors have the highest allocation (each around 21%), followed by industrials (17.50%), consumer discretionary (16.10%) and real estate (8.40%).
Pool (NASDAQ:POOL), which distributes swimming pool and irrigation supplies; tech supplier Entegris (NASDAQ:ENTG), which mainly serves the chip industry; Bio-Techne (NASDAQ:TECH), which develops diagnostic solutions for the healthcare market; oil and gas producer Coterra Energy (NYSE:CTRA); and Trex Company (NYSE:TREX), which manufactures decking and railing products, lead the names on the roster.
Over the past year, VBK is up about 5.6%. The fund hit a record high in early November. But since then, question marks over the effect of the Omicron variant and how the US economy might fare amidst rising inflation levels have put pressure on many small-caps. As a result, the ETF has lost over 7.5% since November.
Trailing P/E and P/B ratios are 31.4x and 0.2x. Given the recent decline in price, interested readers could consider investing around these levels. A fund like VBK could help diversify long-term portfolios that might otherwise be significantly tilted toward mega-cap tech shares.
2. Invesco S&P SmallCap 600 Pure Growth ETF
- Current Price: $167.59
- 52-Week Range: $135.51 - $178.95
- Dividend Yield: 0.16%
- Expense Ratio: 0.35% per year
Our next fund, the Invesco S&P SmallCap 600® Pure Growth ETF (NYSE:RZG), invests in small-cap US firms that are likely to grow faster than their industry peers. Such companies, which are usually at an early stage in their life cycles, are typically selected on three-year growth factors.
RZG, which tracks the returns of the S&P Smallcap 600 Growth Index, currently has 130 holdings. It was launched in March 2006, and net assets have grown to $142.5 million.
The top five sectors include financials (24.17%), health care (19.47%), consumer discretionary (15.17%), information technology (13.90%), and industrials (10.70%). At present, the leading 10 holdings comprise over 15% of the fund.
B. Riley Financial (NASDAQ:RILY), which provides financial and business advisory services; genetic testing group Fulgent Genetics (NASDAQ:FLGT); Encore Wire (NASDAQ:WIRE), which manufactures electrical building wire; athletic goods retailer Hibbett Sports (NASDAQ:HIBB); and Celsius (NASDAQ:CELH), which is known for its calorie-burning beverages, make up some of the names in the fund.
In the past 52 weeks, RZG returned over 21.3%. Like VBG, it also saw an all-time high in early November. Forward P/E and P/B ratios stand at 16.63x and 3.26x.
We should note that small-cap stocks tend to be quite choppy, especially in the short run. As a new earnings season is about to begin shortly, potential investors might consider waiting for a pullback in the price of RZG.
Finally, those investors who prefer value investing instead of growth could consider researching the Invesco S&P SmallCap 600® Pure Value ETF (NYSE:RZV). It is up about 47.5% in the past 12 months and saw a record high on Nov. 8.