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.