Past performance does not necessarily indicate future returns, but many investors are aware of the stock market's tendency to move upward during the first month of the year due to investors searching for bargains after taking tax losses at the end of the previous year. The event is ostensibly dubbed the "January Effect". Small-cap stocks were at one time thought to be more responsive to this phenomenon versus mid- or large-cap stocks.
The following reviews three ETFs focused on these different asset classes that will allow us to prove or dispel the January gift of positive returns. (Learn more about tax-loss selling in our related article, Selling Losing Securities For A Tax Advantage.)
The SPDRS S&P 500 Index (AMEX:SPY) has fallen 8.3% since the beginning of the year through January 22. On inauguration day, January 20, the Dow Jones Industrial Average closed below 8,000 for the first time in 2009. With the U.S. economy still in need of repair, the broader S&P 500 index has been unable to find stable footing to begin a sustained upward push. Investors can consider other large-cap ETF alternatives like the iShares S&P 500 Index ETF (NYSE:IVV), but the ultra low 0.08% expense ratio for SPY gets the nod on this occasion.
During the same time period, the Vanguard Mid-Cap ETF (AMEX:VO) has fallen 7.36%. The VO ETF has its largest portion of assets allocated to financials and industrials. Company names that investors may be less familiar with, like the REIT Annaly Capital Management (NYSE:NLY) and construction materials provider Vulcan Materials (NYSE:VMC), are among VO's top holdings. VO's low 0.13% expense ratio also makes it an inexpensive investment option to consider over similar ETFs like the iShares Russell Mid-Cap Growth Index (NYSE:IWP).
For the final component of our study, we can use the Vanguard Small-Cap ETF (NYSE:VB). The VB ETF has actually had the worst performance of the group, falling 10.03% from January 1-22. VB's 20% asset allocation to financials like Cullen/Frost Bankers (NYSE:CFR) has helped to keep the ETF in negative territory so far this year. There are other small-cap ETFs to consider, like the iShares Russell 2000 Growth index (NYSE:IWO), but once again VB's low .10% expense ratio helped it earn its spot in this review.
Sure, one has to also take into consideration the effects of the change of power to the Obama administration and the grip of the economic slowdown. The good news is investors have learned that no matter what has happened in the past, the future is just too hard to predict. A diverse array of assets, rebalanced over time, with a dollar-cost averaging entry strategy and an eye on low expenses are the main factors that investors must cling to when establishing their investment approach.
To learn more about minimizing your expense ratios, be sure to read Stop Paying High Mutual Fund Fees.