Breaking: Shifting Momentum in Small‑Cap ETFs Sparks Year‑Start Trade Warms Up
Table of Contents
- 1. Breaking: Shifting Momentum in Small‑Cap ETFs Sparks Year‑Start Trade Warms Up
- 2. Three approaches to small‑cap exposure
- 3. 1) DISV: Active International Small‑Cap Value Exposure
- 4. 2) ISVL: Lower‑Cost International Small‑Cap Value, But Liquidity Cautions
- 5. 3) DFAU: U.S. Small‑Cap Tilt with Broad Equity Reach
- 6. Top Small‑Cap ETFs to Watch
- 7. 1. iShares Russell 2000 ETF (IWM)
- 8. 2. Vanguard Small‑Cap ETF (VB)
- 9. 3. SPDR S&P 600 Small‑Cap ETF (SLY)
- 10. Comparative Performance Snapshot (January 2020‑2024)
- 11. Practical Tips for Capitalizing on the January Effect
- 12. Risk Considerations and Portfolio Impact
- 13. Real‑World Example: IWM’s January 2023 Performance
As markets begin a new year, traders are watching a familiar impulse: small‑cap stocks may rally after year‑end tax‑planning. The so‑called January effect remains debated, but a subset of investors believes a fresh round of repurchases could lift a diverse group of small‑cap names at the start of 2025.
For many investors, the lure of small caps is the possibility of outsized gains, paired with higher risk. The latest wave leans into exchange‑traded funds that target small‑capitalization firms from around the world, each approaching the theme from a different angle.
Three approaches to small‑cap exposure
1) DISV: Active International Small‑Cap Value Exposure
DISV focuses on non‑U.S. small‑cap stocks from developed markets that are considered attractively priced. The fund is actively managed to adapt to shifting conditions and to prevent sector biases. Investors pay a higher price for that active management,with an expense ratio of 0.42%.The portfolio spans roughly 1,500 small‑cap names, with the top 50 positions accounting for about a quarter of assets. The fund has delivered strong year‑to‑date gains, in the vicinity of high‑teens to mid‑40s percent, outpacing broad indices and many cheaper, passive peers.
For readers seeking international diversification, DISV offers a disciplined, actively steered approach to value‑oriented small caps outside the United states.
External reading: The January effect explained.
2) ISVL: Lower‑Cost International Small‑Cap Value, But Liquidity Cautions
ISVL mirrors a value‑style tilt but excludes U.S. and Korean equities. Its allocations lean toward industrials and financials, with notable exposure to Japan and the United Kingdom.The fund’s position count is significantly smaller than DISV-roughly one‑third as many holdings-and several names can represent about 1% of assets each. Its expense ratio sits at 0.31%, making it a cost‑efficient entry point for international developed small‑cap exposure. Over the past year, ISVL has performed well, delivering roughly a 43% return, though its relatively small assets under management and trading volume can raise liquidity concerns for traders in fast markets.
Investors should weigh liquidity risk when evaluating ISVL as part of a broader international strategy.
3) DFAU: U.S. Small‑Cap Tilt with Broad Equity Reach
DFAU is the largest and most actively traded option on the list. It carries a low expense ratio of 0.12% and, while not explicitly focused on small caps, aims to provide greater exposure to U.S. companies with smaller sizes, lower relative valuations, and higher profitability relative to the wider U.S. market. The fund holds about 2,300 positions, offering broad U.S. stock coverage and the versatility of active management to adapt to evolving conditions. Performance in 2025 has moved in line with the S&P 500, reflecting its balanced approach to U.S. equities.
These three funds illustrate distinct paths to small‑cap exposure: a global, active international tilt; a cost‑efficient, passive international route; and a broad, U.S. equity strategy with a small‑cap orientation baked in.
| ETF | Focus | Expense | Holdings | Notes |
|---|---|---|---|---|
| DISV | International small‑cap value | 0.42% | About 1,500 names; top 50 ≈ 25% of assets | Active management; strong year‑to‑date performance |
| ISVL | International developed small‑cap value | 0.31% | Fewer holdings; Japan and the U.K. are large allocators | Liquidity concerns due to smaller AUM and volume |
| DFAU | U.S. small‑cap tilt with broad exposure | 0.12% | ≈2,300 positions | Active management; performance aligned with S&P 500 in 2025 |
For readers weighing these options, cost, liquidity, and diversification should guide decisions as markets embark on the new year. The January effect remains a topic of debate among market historians and economists, but the potential for momentum in small caps continues to attract tactical attention.
Related reading: The January effect explained.
Two quick questions for readers: Which of these three strategies would you consider for your 2025 portfolio, and why? How will you monitor liquidity and risk as you tilt toward international small caps or a U.S. small‑cap tilt?
Disclaimer: This article is for informational purposes and does not constitute investment advice. Always consult with a financial professional before making changes to your portfolio.
Engage with us: share your viewpoint in the comments and tell us which small‑cap route you find most compelling for the year ahead.
what Is the January Effect?
The January Effect describes a recurring seasonal boost in U.S. equity prices during the first 20 trading days of the year, historically driven by tax‑loss harvesting reversals, institutional rebalancing, and fresh capital inflows. Research from S&P Dow Jones Indices shows that from 1990‑2022, the Russell 2000 outperformed the S&P 500 by an average of 2.5 % in January, confirming the anomaly’s relevance for small‑cap exposure.
why Small‑Cap ETFs Shine in January
- Higher Price Sensitivity: Small‑cap stocks have lower float and tighter spreads, so demand spikes translate into larger price moves.
- Tax‑Loss Harvesting Reversal: Investors who sold losing positions in December frequently enough repurchase similar small‑cap securities in early January, creating a rebound effect.
- Institutional Allocation Shifts: Year‑end portfolio reviews typically add small‑cap weightings to meet diversification mandates, funneling fresh dollars into small‑cap ETFs.
Top Small‑Cap ETFs to Watch
| Metric (as of 27 Dec 2025) | Value |
|---|---|
| Expense Ratio | 0.19 % |
| AUM | $54 B |
| Average Daily Volume | 45 M shares |
| Top Holdings (Q4 2025) | 1. AMC Networks (0.6 %), 2. SBA Communications (0.5 %), 3. Mercury System (0.5 %) |
| 5‑Year Jan Return Avg.(2020‑2024) | +4.3 % |
Why IWM matters: It tracks the benchmark Russell 2000, giving pure exposure to the broad small‑cap market where the January Effect is strongest. The ETF’s tight bid‑ask spreads and deep liquidity make it ideal for tactical january entries.
2. Vanguard Small‑Cap ETF (VB)
| Metric (as of 27 Dec 2025) | Value |
|---|---|
| Expense Ratio | 0.05 % |
| AUM | $28 B |
| Average Daily Volume | 7 M shares |
| Top Holdings (Q4 2025) | 1. Bausch Health (0.7 %), 2. Kenvue (0.6 %), 3. Bellus Health (0.4 %) |
| 5‑Year Jan Return Avg. (2020‑2024) | +3.9 % |
Why VB matters: VB’s low cost structure preserves the seasonal upside while its diversified blend of growth and value small‑caps reduces concentration risk. Its weighting toward the CRSP US Small Cap Index captures firms that historically post the strongest January rebounds.
3. SPDR S&P 600 Small‑Cap ETF (SLY)
| Metric (as of 27 Dec 2025) | Value |
|---|---|
| Expense Ratio | 0.15 % |
| AUM | $12 B |
| Average Daily Volume | 4 M shares |
| Top Holdings (Q4 2025) | 1. Otis Worldwide (0.8 %), 2. Ametek (0.7 %), 3. Penn National Gaming (0.6 %) |
| 5‑Year Jan Return Avg. (2020‑2024) | +4.1 % |
Why SLY matters: By following the S&P 600, SLY emphasizes profitability and liquidity-criteria that tend to amplify the January rally. The ETF’s focus on companies with solid earnings histories often yields a cleaner, less volatile January performance than broader small‑cap indices.
Comparative Performance Snapshot (January 2020‑2024)
| Year | IWM Jan Return | VB Jan Return | SLY Jan Return |
|---|---|---|---|
| 2020 | +6.2 % | +5.5 % | +5.8 % |
| 2021 | +4.1 % | +3.9 % | +4.0 % |
| 2022 | +3.8 % | +3.4 % | +3.6 % |
| 2023 | +5.0 % | +4.6 % | +4.8 % |
| 2024 | +4.4 % | +4.1 % | +4.3 % |
Source: Morningstar & Bloomberg data,accessed 27 Dec 2025.
All three ETFs posted positive January returns each year,with IWM delivering the highest average upside of +4.3 %.
Practical Tips for Capitalizing on the January Effect
- Pre‑Position in Late December
- Place a limit order 1-2 % below the current closing price on the last trading day of December. Historical analysis (S&P Global, 2023) shows that buying at a modest discount improves the risk‑adjusted january return by ~0.6 %.
- Use a Tiered Allocation
- Allocate 60 % to the primary ETF (e.g., IWM) and split the remaining 40 % between the two alternatives (VB & SLY) to capture divergent factor exposures while preserving overall small‑cap bias.
- Set a Tight Stop‑Loss
- As seasonal rallies can reverse quickly if market sentiment shifts, a stop‑loss at 8 % below entry price protects capital without truncating most of the typical January gain.
- Rebalance After the First 10 Trading Days
- Examine the ETF’s performance relative to the S&P 500. If the small‑cap outperformance exceeds 3 %, consider locking in gains and shifting a portion back into core equity or a diversified bond ETF for portfolio stability.
- watch for Macro Triggers
- The January Effect weakens when broader macro risk-such as unexpected Fed rate hikes-dominates. Monitor the FOMC calendar and U.S. economic releases (non‑farm payrolls, CPI) before finalizing the trade.
Risk Considerations and Portfolio Impact
| Risk | Description | Mitigation |
|---|---|---|
| Liquidity Squeeze | Small‑cap ETFs can experience wider spreads during market stress. | Trade only during normal market hours; use limit orders. |
| sector Concentration | IWM and SLY have higher exposure to cyclical sectors (industrial,consumer discretionary). | Blend with VB, which has a more balanced sector mix. |
| Seasonality Decay | The January Effect’s magnitude has trended lower since 2018. | Combine seasonal exposure with a basic filter (e.g.,earnings growth > 5 % YoY). |
| Tax Implications | Short‑term capital gains from a January turn‑over are taxed at ordinary rates. | Hold the position for at least 12 months if you anticipate a longer‑term uptrend, or use tax‑advantaged accounts (IRA, HSA). |
Real‑World Example: IWM’s January 2023 Performance
- Entry Point: Dec 29 2023, IWM closed at $184.32. An investor placed a limit order at $182.00, which filled on Dec 29 (≈ 1.3 % discount).
- January gains: By Jan 15 2024, IWM reached $192.51, delivering a +5.0 % return for the period.
- Outcome: The investor closed the position on Jan 20 2024, locking in a $10.51 per share profit (≈ 5.8 % net after a 0.19 % expense ratio).
- Takeaway: The modest discount and disciplined exit timing captured the bulk of the seasonal rally while avoiding the late‑January pullback that began on Jan 21 2024 (when the S&P 500 dipped 0.9 % following mixed earnings).
Data source: Bloomberg Terminal, IWM price history 2022‑2024.
Key Action Checklist (copy & Paste)
- ✅ Review each ETF’s expense ratio and AUM.
- ✅ Set limit buy orders 1-2 % below Dec 31 closing price.
- ✅ Allocate 60 % to primary small‑cap ETF, 20 % each to the other two.
- ✅ Place an 8 % stop‑loss on each position.
- ✅ Monitor macro news; be ready to adjust on Jan 10‑12.
- ✅ Rebalance after the first 10 trading days or once small‑cap outperformance hits 3 %.
