An initial lull ahead of a so-called “January Effect” is stifling the U.S. equities rally investors saw in 2023 and small caps haven’t been immune. Nonetheless, active strategies can help mute the short-term downside by adding flexibility when markets fluctuate.
The Russell 2000, the prime indicator of small cap performance, is also feeling the downside to start the year. Seemingly, this is to a larger degree than its large-cap peers. The capital markets are hoping that the “January Effect” can eventually take over and push equities back towards the upside. This would give prospective small cap investors an opportunity to take advantage of the pullback.
“The Russell 2000 Index declined 3.7% in the initial week of 2024. The trend might reverse, given what is called the ‘January Effect,’ which refers to a seasonal increase in stock prices during the month of January,” noted Zacks. “This phenomenon is often observed in the stock market, where, historically, stock prices have shown a tendency to rise more in January than in other months.”
To get small cap exposure, active ETFs offer the flexibility to shift with the markets while also adding diversification. That’s all inherent in U.S. small cap equities via the Avantis U.S. Small Cap Value ETF (AVUV). AVUV invests primarily in a diverse group of U.S. small-cap companies across market sectors and industry groups.
Additionally, this fund also features a low-cost solution. It has a 0.25% expense ratio that can compete with passive funds that also focus on small-cap exposure. In addition, the fund has a more discerning value screener. This is helpful in the current times. A lot of macroeconomic uncertainty still exists, especially regarding the direction of interest rates. But it’s still an ideal way to invest in the vast universe of small-cap companies while allowing for a value factor strategy to handpick holdings.
An International Small Cap Option
Investors can also use ETFs to get international exposure that have the same active management strategy built into the fund. As such, consider the Avantis International Small Cap Value ETF (AVDV), which invests in a broad group of non-U.S. small-cap value companies believed to have higher expected returns across developed market countries, sectors, and industries.
Like AVUV, this fund focuses on value, investing in small cap companies that are trading at low valuations, but with high profitability ratios. Getting the added international diversification won’t come at a premium as the fund also offers a low-cost solution with a 0.36% expense ratio.
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