ETF Trends
ETF Trends

The S&P 500 and Dow Jones Industrial Average soared to record highs last week as markets shrugged off, among other things, the Federal Reserve’s tapering announcement and the Europe Union’s loss of its AAA credit rating.

Small-caps got in on the act as well, giving investors reason to believe that after a sluggish start to December, higher-flying lower market value names will be able to make good on the promise of a January Effect. The iShares Russell 2000 ETF (NYSEArca: IWM) added 2.8% last week. [ETFs for the January Effect]

Micro-cap ETFs participated in the low market value ebullience as well as the iShares Microcap ETF (NYSEArca: IWC) rose 3.3% while the Guggenheim Wilshire Micro-Cap ETF (NYSEArca: WMCR) tacked on 2.5%. That is an encouraging sign ahead of January, which is typically a strong month in which to be long micro-caps.

The tax-loss selling hypothesis is based on the belief that year-end tax-loss selling causes stock prices to be depressed in December and then bounce back in January. Because only individuals sell stocks for tax purposes, the stocks most affected are the smaller issues that institutions avoid. Moreover, smaller issues are more volatile and thus more likely to have a large loss (or large gain), so that they are more likely to be sold for tax advantage,” according to the 2004 article “The January Effect Revisited” by Paul-Charles Pietranico and Mark W. Riepe.

Their research indicate “stocks in the 10th decile (with very small capitalizations) outperformed the 1st decile (very-large-capitalization) stocks in 70 of the 77 Januaries from 1926 to 2002,” according to Oguz Erkol.

There is no other other month of the year in which micro-caps come even remotely close to matching the level of out-performance seen in January.

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