Global ETFs For The January Effect

For one trading day at least it looks as if the January Effect, the scenario under which small-caps lead an early-year market rally, is working.

With a Wednesday gain of almost three percent on volume that was well above double the daily average, the iShares Russell 2000 Index (NYSEARCA:IWM) surged to a new-all time high.

iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB)
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That should give fans of the January Effect something to brag about. When including Wednesday’s gain, the $15.9 billion ETF has jumped almost six percent in the past month.

So it looks like U.S. small-caps are off to a fine start in 2013. If that becomes a prevailing trend, investors may want to add some international small-cap exposure to their portfolios as well. As has been noted, some of the small-cap ETFs tracking BRIC nations outperformed their large-cap counterparts in 2012.

If risk appetite is truly being renewed, select international small-cap funds should offer valid complements or alternatives to U.S.-focused equivalents. Here are some sound ideas.

WisdomTree Europe SmallCap Div Fd (NYSEARCA:DFE) Coming off a year in which it surged almost 22 percent, the WisdomTree Europe SmallCap Dividend Fund could be in for another big year as late-comers embrace compelling valuations for European equities. The Stoxx 600 Index ended 2012 trading at just 11.4 times 2013′s estimated earnings, according to Bloomberg.

Adding to the good news is another Bloomberg report that notes the Euro Stoxx 50 Index may rally as much as eight percent this month.

DFE allocates over 35 percent of its combined weight to discretionary and financial services names, putting the ETF in position to soar in a risk on environment. Noteworthy is the fact that London’s FTSE 100 surged above 6,000 today and DFE features a weight of 24.4 percent to the U.K. Investors are also compensated for taking on the risk of European small-caps by DFE, which features a 30-day SEC yield of four percent.

Market Vectors ETF Trust (NYSEARCA:GERJ) GERJ will turn two years old in April, but an assets under management total of just $4.5 million indicates investors have not yet warmed to this ETF. That is a shame because GERJ soared almost 26 percent last year, outperforming the larger iShares MSCI Germany Index Fund (NYSEARCA:EWG) along the way.

After a strong 2012 for German equities, some analysts are taking a more cautious approach to the Eurozone’s largest economy this year.

However, if German stocks come even remotely close to delivering an encore in 2013, GERJ may prove to be the better bet once again. On a valuation basis at least, GERJ looks more attractive here. The fund has a P/E ratio of 11.24 and a price-to-book ratio of 1.43, according to Market Vectors data. That compares with EWG’s P/E of 18.23 and a price-to-book ratio of 2.19.

WisdomTree Emerging Mkts Small Cp Div Fd (NYSEARCA:DGS) For those that do not want to make a country-specific bet on emerging markets small-caps, the WisdomTree Emerging Markets SmallCap Dividend Fund offers perhaps the best alternative for eschewing single country risk while still capturing small-cap exposure in the developing world.

At the top, the fund is somewhat conservative with Taiwan and South Korea combining for about 33.6 percent of the fund’s weight. The subsequent country weights are also of importance to investors. With Thailand, Malaysia and Turkey combing for almost 26 percent of the ETF’s weight, DGS stands as arguably the best avenue for getting small-cap exposure in those nations.

Additionally, DGS is another attractively valued ETF. At the end of the third quarter, DGS had a P/E ratio of about 13 and a price-to-book ratio of just over one, according to WisdomTree data. Even if those numbers have come up since the end of that quarter, they probably have not risen dramatically enough to touch IWM’s P/E of 25.22 and its price-to-book ratio of 3.1.

This article was originally written by The ETF Professor, and posted on Benzinga.

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