Play The January Effect With These Small Cap ETFs

by: Benzinga

By The ETF Professor

We're less than four days from the start of January, and that means it time to start forecasting the odds of a real January Effect.

The January Effect is defined as a run up in stocks, often following a down December. Obviously, this doesn't happen every January, but the first month of the year is often pivotal in determining the outcome for stocks for the entire year. It's safe to say the bulls would like to see a legitimate January Effect start here in a few days.

It should also be noted that a real January Effect is often led by small-caps. One analyst said, since 1926, small-cap stocks have beaten large caps 76% of the time in January, according to Barron's.

Of course, there is some debate about whether or not we'll see a January Effect in 2012. Jeffrey Hirsch, editor of the "Stock Trader's Almanac," recently told Bloomberg News that he sees a small cap-led January Effect next year. Bank of America, on the other hand, doesn't agree.

So maybe small-caps will rise next month. Maybe they won't, but let's get in the holiday spirit and assume they will by looking at the following ETFs.

PowerShares S&P SmallCap Energy ETF (NASDAQ:PSCE): Considering that small-caps have been hit hard for most of 2011, and energy names have tumbled in recent months, the PowerShares S&P SmallCap Energy ETF has held up very nicely by jumping more than 3% year-to-date. An old winner from the ETF Professor, PSCE looks good above $36. Not to mention, the ETF is home to a few takeover targets and those companies could be acquired next year, fueling a run back to the mid-$40s for PSCE.

PowerShares S&P Consumer Staples Small-Cap ETF (NASDAQ:PSCC): We've spent plenty of time discussing staples stocks and ETFs this year. Well, it could easily continue in 2012 with Europe's sovereign debt crisis nowhere near being fixed and a presidential election looming in the U.S. Definitely an under the radar play, PSCC has just $20.3 million in assets under management. That means a lot of investors have missed out on the ETF's 6% rise this year.

Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA): There's not a lot of difference between the Schwab U.S. Small-Cap ETF, SPDR S&P 600 Small Cap ETF (NYSEARCA:SLY), the iShares S&P SmallCap 600 Index Fund (NYSEARCA:IJR) and the Vanguard Small Cap ETF (NYSEARCA:VB), but there are two things to note before getting involved with SCHA. First, it has the lowest expense ratio of the aforementioned quartet. Second, it has been the worst performer of the group in 2011. Things to ponder.

Vanguard Small Cap Growth ETF (NYSEARCA:VBK): For those willing to be really bullish on small-caps, a growth ETF is the way to go and the Vanguard Small Cap Growth ETF is the one to do it with. Home to almost 1,000 stocks, VBK has a scant expense ratio of just 0.12% and it's performance this year has been decent considering small-caps and growth have basically been off the table. VBK has started to perk up recently, perhaps indicating that it's primed for a January Effect of its own.

Action Items

Bullish: Traders who believe that small-caps will lead the charge in January might want to consider the following trades:

  • Long PSCE. The ETF is levered to the price of oil, making it a great ETF for quick gains.
  • Long small-cap growth. VBK or the WisdomTree SmallCap Earnings Fund (NYSEARCA:EES) will help with that.
  • Get wild and crazy with the Direxion Daily Small Cap Bull 3X Shares (NYSEARCA:TNA) as a short term trade.

Bearish: Traders who believe that small-caps will falter may consider alternative positions:

  • Long the Direxion Daily Small Cap Bear 3X Shares (NYSEARCA:TZA). Another good idea for the active trader.
  • Long the ProShares UltraPro Short Russell2000 (NYSEARCA:SRTY). Less leverage than TNA, but it tracks the Russell 2000 on an inverse basis.
  • Long conservative large-cap sectors, such as staples.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.