Prepare for the January Effect With These 3 Small-Cap ETFs

Key Points

• In the new year, small-cap names may be poised to take off based on seasonal investing patterns.
• Two ETFs to consider for broad small-cap exposure are the DISV and the ISVL.
• As a counterbalance to these funds, the DFAU is an often-overlooked broad-based U.S. equities ETF.

Though investors do not universally agree on the existence of the January Effect, there is at least in theory a phenomenon in which small-cap stocks may rise at the start of the year after investors have sold off losing stocks late in the prior year to offset capital gains. When they then repurchase shares in January, the theory holds, these stocks may see a boost.

For investors interested in small-cap stocks, historical January market trends may be just an added bonus. After all, small-caps tend to carry potential for outsized returns (although, at the same time, they are typically riskier than larger, better-established firms as well).

Small-cap exchange-traded funds (ETFs) are a popular way to mitigate some of this risk through a diversified basket of small-cap names. With the start of a new year, a seasonal ETF strategy may include a shift toward small-cap funds in an effort to capitalize on potential fresh momentum. Here are three widely followed funds that approach “small-cap exposure” from very different angles.

DISV: Active International Small-Cap Value Exposure, But a Higher Fee

The Dimensional International Small Cap Value ETF BATS: DISV targets non-U.S. small-cap stocks from developed markets, assessed by fund managers to have comparably low prices.

The fund is actively managed in a bid to ensure responsiveness to shifting market conditions, to avoid sector biases, and to maintain control over the portfolio.

Investors should expect to pay a small premium for this active management—DISV has an expense ratio of 0.42%, making it somewhat more costly than many small-cap alternatives with an index-linked approach.

For the extra fee, investors get access to a curated portfolio of some 1,500 small-cap names from around the world.

The portfolio is broadly diversified, although the top 50 positions do account for roughly a quarter of all invested assets. Investors may be more willing to accept a higher expense ratio relative to other small-cap ETFs when considering DISV's history of returns: the fund has returned nearly 47% year-to-date (YTD), significantly outpacing the performance of the S&P 500 more broadly—and of popular and inexpensive small-cap funds like the iShares Core S&P Small-Cap ETF NYSEARCA: IJR, which is up not even 9% over the same period.

ISVL: A Lower-Cost International Small-Cap Value Option, But Has Liquidity Concerns

With a similar focus to DISV, the iShares International Developed Small Cap Value Factor ETF BATS: ISVL targets small-cap firms identified based on value characteristics, excluding companies from both the United States and Korea.

The fund leans toward industrials and financials names but also includes stocks across a range of other sectors and industries. Companies based in Japan and the U.K. receive the largest allocations.

ISVL's basket is not as broad as DISV's, only containing around a third as many positions and with a handful of individual companies representing roughly 1% of the portfolio each.

On the other hand, this passively managed fund has a lower expense ratio of 0.31%, making it appealing to those seeking a somewhat more cost-efficient way of gaining exposure to the international developed small-cap landscape.

In terms of performance, ISVL is also well ahead of the broader market, returning nearly 43% in the last year. Investors should note, however, its relatively small assets under management (AUM) and trading volume, which may make for liquidity concerns.

DFAU: A Small-Cap Tilt With Broad U.S. Equity Exposure

The largest and most heavily traded ETF on our list is the Dimensional US Core Equity Market ETF NYSEARCA: DFAU.

With an expense ratio of only 0.12%, this actively managed fund is also the least expensive.

While DFAU does not explicitly target small-cap names, it aims to provide increased access to U.S. companies with smaller capitalization, lower relative prices, and higher profitability compared to the remainder of the U.S. market.

DFAU's portfolio comprises 2,300 positions, making this a good choice for a broad-based U.S. stocks fund and a good balance to one of the small-cap names above. With active management, investors can also be assured that the fund can make pivots as necessary to respond to shifting market conditions. The ETF's performance has been roughly in line with that of the S&P 500 in 2025.