Fiscal 2012 has not been particularly smooth sailing for
investors. The year was a very eventful one to say the least with
a series of sovereign rating downgrades as well as monetary
stimulus from central banks across the board.
Nevertheless, as the age old saying goes
'all's well that ends well'
, as the stock markets have ended the time period on a positive
note with the S&P 500 adding double digits and at least
partially making up for a flat 2011.
As we close the books on 2012, investors will have their focus
on the year-end tax liability. Given this, a look at an
investment strategy is prudent as it enables investors to profit
from a broader market sentiment in the first month of the New
Year itself (read
Which ETF Should You Buy This Holiday Season?
This is popularly known as the
The basic idea of this strategy is that investors sell off
their losing position trades thereby incurring losses in these
trades in December of the previous year in order to set off these
losses against the profits made on other trades throughout the
year. This is done as a means to reduce the capital gains tax
This idea is popularly known as
'tax loss harvesting.'
However, in January of the next year the buying begins yet again
thereby pushing the equity markets higher in the first month of
the new fiscal year.
Several academic researches such as the one by
Professor Hakan Altin
in the research paper
"Stock Exchanges and January Effects"
in the International Research Journal of Finance and Economics -
Issue 85 (2012), explains this phenomenon. The paper studies the
magnitude of the January Effect across various developed as well
as emerging markets.
However, its starts with the premise that small cap stocks are
more impacted by this phenomenon. Furthermore, the same has been
, that this effect is more prominent in small cap stocks rather
than mid and large cap stocks which often need more in buying to
move the needle then their small cap counterparts (read
Try Small Cap ETFs to Gain from Chinese Domestic
For investors who seek to capitalize on the opportunity of the
January effect in a basket form, the following small cap U.S
could be solid pure play choices to play the idea if it
materializes in 2013:
iShares Russell 2000 ETF (
is by far one of the largest and most popular ETFs available in
the U.S. small cap space. It has total assets worth $15.66
billion and on average around 40 million shares exchange hands
each day. IWM tracks the Russell 2000 index which measures the
performance of 2000 small cap stocks from the entire universe of
publicly traded U.S. stocks.
The ETF charges an expense ratio of 23 basis points and pays
out 1.61% as yield. The ETF has returned 13.15% for a one year
period as of 30
November 2012. IWM currently has a Zacks Rank of 3 or
risk outlook (see more in the
Vanguard Small Cap ETF (
was launched in January of 2004 and since then has managed to
amass an asset base of around $4.5 billion. The ETF tracks the
MSCI US Small Cap 1750 Index which measures the performance of
the small cap stocks from the U.S. equity space.
The ETF comprises of a very well diversified portfolio of
1,777 stocks allocating just 2% of its total assets to the top 10
holdings. It allocates maximum to aggressive sectors such as
Financials (23.10%) and Information Technology (16.70%). It also
charges a low expense ratio of 0.16% to investors and pays out
1.20% as an annual yield.
The ETF has an average daily volume of around 253,000 shares
and has returned around 15% for the one year period as of 30
November 2012. VB currently has a Zacks Rank of 3 or
risk outlook (read
Time to Invest in Low Volatility ETFs?
Schwab U.S. Small Cap ETF (
is a relatively new ETF, nevertheless it can be another
interesting choice for investors from the U.S small cap equity
space to play the January effect. The ETF has been able to amass
an asset base of around $735.60 million since its inception in
SCHA tracks the float adjusted market capitalization weighted
Dow Jones U.S. Small-Cap Total Stock Market Total Return Index.
The ETF is composed of 1,746 U.S. small cap stocks.
The best part about the ETF is its paltry expense ratio of 10
basis points making it one of the lowest priced products from
this space. It places its bets heavily across aggressive sectors
like Financials, Industrials and Information Technology.
SCHA pays out a yield of 1.21% and has returned around 15% for
the one year period as of 30
November 2012. The fund currently has a Zacks Rank of 2 or
Risks and Drawbacks
While it is true that past data does show that stocks tend to
get a boost in the first month of the year, things have been a
bit different this year. Political issues have plagued December
markets, while there has been a tinge of optimism as well.
If anything, there has been a decent performance for small
caps in December, bucking the trend that many had seen in years
past with multiple percentage points gains on the table for the
time period in question (read
Gold ETFs: Is the Sell-Off Overdone?
This is not that surprising as the sell off this year has
already happened post the presidential election in mid November
over fiscal cliff issues and the markets now are more in a
Political issues could also impact the space now that we are
in 2013 as well, as it still remains uncertain how the economy
will react to the deal beyond the early positive results. This
could be especially true if the debt ceiling debate becomes
intense, as this could throw another wrench into the January
Effect, although we look for this fight to begin in earnest once
the calendar changes to February.
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ISHARES TR-2000 (IWM): ETF Research Reports
SCHWAB-US SC (SCHA): ETF Research Reports
VIPERS-SM CAP (VB): ETF Research Reports
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