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NEW YORK, January 26, 2025
Small-cap Stocks could See a January Boost-here’s How to Play It
Table of Contents
Three ETFs offer different routes to potentially capitalize on the “January Effect.”
- The “January Effect” suggests small-cap stocks may rise at the start of the year.
- Small-cap ETFs offer a diversified way to tap into this potential, but come with risks.
- Three ETFs-DISV, ISVL, adn DFAU-provide varying levels of exposure and cost.
Could a seasonal quirk in the market offer investors an early-year advantage? While not universally agreed upon,the “January Effect” proposes that small-cap stocks tend to outperform larger companies during the month of January.this phenomenon is frequently enough attributed to tax-loss harvesting at the end of the year and renewed investor optimism at the start of a new one. Small-cap stocks generally offer higher returns, though they typically carry more risk than larger, more established firms. Exchange-traded funds (ETFs) focused on small-cap stocks can definitely help mitigate some of this risk through diversification. A seasonal ETF strategy might involve shifting toward small-cap funds to potentially capitalize on fresh momentum.
1. DISV: active International Small-Cap Value Exposure, But a Higher Fee
The DISV fund targets non-U.S. small-cap stocks from developed markets, selecting companies fund managers deem undervalued.This actively managed fund aims to respond to changing market conditions, avoid sector concentration, and maintain portfolio control. However, this active management comes at a cost: DISV has an expense ratio of 0.42%,higher than many index-linked small-cap alternatives.
For that premium, investors gain access to a portfolio of approximately 1,500 small-cap companies worldwide. While broadly diversified, the top 50 holdings represent roughly a quarter of the fund’s assets. DISV’s performance has been strong, returning nearly 47% year-to-date (YTD), considerably outpacing the S&P 500 and other small-cap funds like the iShares Russell 2000 ETF (IWM), which is up less than 9% over the same period.
2. ISVL: A Lower-Cost international small-cap Value Option, But Has Liquidity Concerns
Similar to DISV, the ISVL fund focuses on small-cap companies identified as undervalued, excluding those from the United States and Korea. The fund leans toward industrial and financial sector stocks, with significant allocations to companies based in Japan and the U.K.ISVL’s portfolio is less extensive than DISV’s,holding around a third as many positions,with individual companies representing a smaller percentage of the total assets.
This passively managed fund offers a lower expense ratio of 0.31%, appealing to cost-conscious investors. ISVL has also outperformed the broader market, returning nearly 43% in the last year. However, investors should be aware of its relatively small assets under management (AUM) and trading volume, which could pose liquidity concerns.
3. DFAU: A Small-Cap Tilt With Broad U.S. Equity Exposure
The largest and most actively traded ETF on this list is the DFAU. With an expense ratio of only 0.12%,it’s also the least expensive. While DFAU doesn’t exclusively target small-cap companies, it aims to increase exposure to U.S. companies with smaller market capitalization,lower relative prices,and higher profitability compared to the broader U.S.market.
DFAU’s portfolio comprises 2,300 positions, making it a good choice for broad-based U.S. stock exposure and a potential complement to the more focused small-cap funds mentioned above. Active management allows the fund to adjust to shifting market conditions. the ETF’s performance has been roughly in line with the S&P 500 in 2025.
