What December Could Bring for Small-Cap ETFs

December 4th at 7:00am by Tom Lydon

There is no getting around it: Small-cap exchange traded funds have been on fire for most of 2013. The iShares Russell 2000 ETF (NYSEArca: IWM) and the SPDR S&P 600 Small Cap ETF (NYSEArca: SLY) are up an average of 33%.

With December here, IWM, SLY and rival small-cap ETFs will be in focus on expectations of an early start to the January Effect, the phenomenon where small-caps lead large-caps in the first month of the year. A strong January Effect usually translates to a strong overall year for U.S. equities. [Prepare for the January Effect With ETFs]

To get to Januay, IWM and friends need to get through December, hopefully unscathed for the bulls. The good news is “December has historically been a strong month for small-cap stocks as the Russell 2000 has risen an average of 2.83% with positive returns nearly 80% of the time,” according to Bespoke Investment Group.

Interestingly, on the rare occasions that the Russell 2000 has been sitting on a year-to-date gain of 20% or more through the end of November, the index tracked by IWM has “averaged a slightly lower gain of 2.43% with positive returns 71.4% of the time,” Bespoke notes.

IWM is not off to a strong December. The ETF is off 1.5% since Nov. 29 and the Russell 2000 is bumping up against some stiff long-term resistance.

That does not mean small-caps will not live up to their reputation for strong holiday season performances. However, risk-tolerant traders that are long ETFs such as IWM may want to consider a short-term hedge of those positions with a bearish ETF like the Direxion Daily Small Cap Bear 3X Shares (NYSEArca: TZA).

Russell 2000 December Performances

Chart Courtesy: Bespoke Investment Group

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWM.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.