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3 Microcap ETFs to Buy for the January Effect

Zacks Equity Research

For the equity world, 2013 was a banner year. This trend will likely continue this year as well even with the Fed’s decision to start tapering its ongoing stimulus this month. This is because the U.S. economy is showing substantial growth with a string of robust data on the housing, labor and retail front.
In such a backdrop, small caps tend to perform better than the large and mid cap stocks as these are pretty much entirely focused on the U.S. for their revenues, potentially making them great choices in a recovering economy and a trending U.S. market. Further, the pint-sized securities benefit the most in the first month of the year if history is any guide (read: 3 Small Cap Sector ETFs Leading the Market).
Historically, U.S. small caps have outpaced the broad market index in the month of January due to the ‘January Effect’. This is the seasonal anomaly in which investors redeploy their capital in the stock market in January after they book losses on stocks in December to offset gains on other stocks for tax purposes. This phenomenon pushes the equity market higher in the first month of the year.
This is especially true given that small caps have outpaced the large cap counterparts in four out of five past years and is on the way to lead in 2014 as well. Over the trailing one month, small cap (IWM) and micro cap (IWC) funds gained 2.13% and 3.45%, respectively, compared with a gain of 1.25% for the large cap fund (SPY).
According to some market experts, January Effect runs from mid December through the end of February and small caps continue to outperform their large cap cousins over this time period.  
Given the solid track record and growth prospects, investors could take a closer look at some of smallest of the small, the micro cap ETFs, which could offer excellent exposure to this potent stock market anomaly (read: All Small Cap ETFs here):
iShares Micro-Cap ETF (IWC)
This ETF tracks the Russell Microcap Index, holding a large basket of 1362 mini securities. The fund is widely diversified across each security as none of them holds more than 0.37% of total assets. The product is slightly tilted toward value stocks as these make up for 46% share in the basket (read: Which ETFs Were Popular in 2013?).
From a sector look, financial services take the top spot with 27.43%, closely followed by health care (16.55%) and technology (14.24%). The fund has amassed $871.4 million in its asset base and trades in volume of more than 145,000 shares per day. The ETF charges 72 bps in fees per year from investors and added nearly 45% in 2013.
PowerShares Zacks Micro Cap Fund (PZI)
This fund seeks to outperform passive benchmark micro-cap indexes and other actively managed U.S. micro-cap strategies by tracking the Zacks Micro Cap Index. The ETF has amassed $57.6 million in its asset base while sees light volume, probably increasing the total cost beyond the expense ratio of 0.93%.
Holding 400 stocks in its basket, the product is well balanced across each security as none of them take up more than 0.5% of assets. However, the financials sector takes the largest share in terms of sector at nearly 31% share while industrials, consumer discretionary and information technology round off to top four with double-digit allocation (read: 3 Financial ETFs to Watch on Volcker Rule Implementation). The fund has a definite tilt toward value stocks and is up over 44% for 2013.
Wilshire Micro Cap ETF (WMCR)
This product is the low cost choice in the micro-cap space, charging just 50 bps in fees and expenses. It is unpopular and illiquid having accumulated just $45.6 million in its asset base while trades in paltry volume. The fund follows Wilshire US Micro-Cap Index and holds 953 securities with a nice mix of blend, value and growth stocks.
Here again, financials take the top spot at 28.5%, followed by healthcare (19.68%), information technology (14.17%) and consumer discretionary (13.38%). In terms of holdings, each security holds less than 0.61% of total assets. The ETF returned 45.6% in 2013.
Bottom Line
January is truly the time to get in on micro cap securities, assuming that the historical trend holds true in 2014. Further, a booming stock market and an improving economy has boosted the appeal of these pint-sized funds that present growth opportunities to play the January Effect.
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