This is the time of year when investors start thinking about the Santa Claus rally and the January Effect, events that when they occur are often favorable to small-caps the corresponding exchange traded funds such as the iShares Russell 2000 ETF (NYSEArca: IWM).
IWM, the largest small-cap ETF, is up 1.7% over the past month, giving investors some reason to believe that there is year-end rally potential in store.
Investors have been shifting into small-caps as the asset category outperformed larger stocks. If the U.S. economy continues to expand, smaller companies may continue to outperform. In contrast, large-cap benchmarks, like the S&P 500, include more slow-growing multinationals, which may have seen weakened overseas revenue streams after the U.S. dollar strengthened.
Smaller companies are a play on the domestic economy. While previous economic reports have been less than appealing, economists expect the gross domestic product to accelerate in the second half of the year. [Mid-, Small-Cap ETFs to Focus on U.S. Growth]
“It’s a well known and generally reliable seasonal pattern that equities, and particularly small caps stocks, do well in the final three months of the year. This tendency has been rock solid since the 2008 financial crisis, with the small caps posting positive monthly numbers through the end of the year and investors seeing a small caps rally into year end,” according to See It Market.
Additionally, the buyback yield for small-caps – the dollar amount of repurchased shares divided by the company’s market cap – averages 1.5% compared to 2.7% prior to the crisis, according to Barclays.
Small-cap consumer discretionary and technology firms have been buyback leaders in that cap spectrum, extending a theme that has been seen over the past several years with large-cap share repurchasers. [Small-Cap ETF Differences are big Deals]