The S&P 500 is off 0.6% to start 2014, and with that, there would appear to be diminished chances for a legitimate January Effect to materialize.
After all, time is running out on January, but there is some good news and it may not be getting the attention it deserves. The January Effect is the scenario where small-caps lead large-caps in the first month of the year, setting the broader market up for a (usually) positive result for the year. [ETFs and the January Effect]
Good news: The iShares Russell 2000 ETF (NYSEArca: IWM) is up 0.5% since the start of year. Good news Part II: The iShares Russell 2000 Growth ETF (NYSEArca: IWO) has climbed 1.7% since 2014 started. IWO ranks as the ninth-best broad market ETF in 2014.
The good news for those worried about the lack of a January Effect does not end there. Small-caps are not just outpacing the S&P 500, but micro-cap ETFs have been noticeably more impressive than their small-caps peers. Off the top four broad market ETFs to start 2014, two are micro-cap funds, according to Dorsey Wright & Associates data.
That pair is comprised of the Guggenheim Wilshire Micro-Cap ETF (NYSEArca: WMCR) and the iShares Microcap ETF (NYSEArca: IWC). WMCR is up 4% and touched its price in six and a half years last Friday. IWC, the largest micro-cap ETF by assets, has gained 3% year-to-date. [Embrace Micro-Cap ETFs Before January]
The PowerShares Zacks Micro Cap Portfolio (NYSEArca: PZI) is up 1.5% this year and like WMCR, is flirting with multi-year highs. A frequent criticism of micro-cap ETFs is that these funds are often short on true micro-caps, a designation that ends at the $300 million in market value level.
The average market value of IWC’s 1,358 holdings was $420 million at the end of the third quarter while PZI’s 400 components had an average market cap of $489 million at the end of last year. WMCR was more true to the micro-cap definition with its 953 holdings having an average market value of $252 million at the end of the third quarter, according to Guggenheim data.
What cannot be quibbled with is that these ETFs are benefiting from having the right sector mixes at the right time. That means substantial allocations to financial services and health care (really biotechnology at the micro-cap level) stocks.
The combined weights to those sectors for the aforementioned ETFs are as follows: 48% for WMCR, almost 45% for IWC and over 39% for PZI. Small and micro-cap community and regional banks are seen as winners in rising interest rate environments because of the boost rising rates can provide to the net interest margins of those banks.
The average number of health care stocks in the top-10 holdings of IWC, PZI and WMCR is 4.6, indicating these funds offer decent leverage to the ongoing ebullience surrounding the biotech industry. [Small Stocks Could Mean Big Things for This Biotech ETF]
Guggenheim Wilshire Micro-Cap ETF
Tom Lydon’s clients own shares of IWC and IWM.