There’s less than two weeks left in 2025, but for small-caps, the new year is already here. Morningstar made light of the outperformance in small-caps, which historically manifests itself in an early year rally known as the “January Effect.”
However, history has been rewriting itself as of late. Ambitious traders looking to position themselves ahead of the new year have been causing the January rally to arrive earlier than anticipated.
“As with many Wall Street patterns, the timeline accelerated as traders attempted to jump in ahead of the crowd,” Morningstar explained, noting that small-caps didn’t move the needle post-Thanksgiving, although a “Santa Claus rally” could be in the works. “As a result, the ‘effect’ moved into December a number of years ago and remains there today.”
When looking at the S&P 500 and the perfunctory small-cap index in the Russell 2000, the former has been outpacing the latter for much of the year. Of course, large-caps associated with artificial intelligence (AI) mania have been driving much of the S&P 500’s return this year, but small-caps have been patiently awaiting their turn.
'Tis the Seasonality
Could 2026 see small-caps overtake their large-cap brethren? While nobody has a crystal ball to definitively say “yes,” bullish traders can use the Direxion Daily Small Cap Bull 3X Shares (TNA ) as a potential opportunity if their conviction is strong.
The fund tracks the Russell 2000 Index, which is the quintessential benchmark for tracking small-cap performance. The obvious difference is that TNA adds additional juice, with three times the exposure to the index.
In fact, the holiday season is an ideal time for all market caps. With that, traders can also use the Direxion Daily S&P 500® Bull 3X Shares ETF (SPXL ) as well as the Direxion Daily Mid Cap Bull 3X Shares (MIDU ) this time of year.
“One other factor that is important is seasonality,” Morningstar added. “This is typically a seasonally bullish time of the year, lasting through the first two trading days of the new year.”
Like all leveraged products, only experienced traders should use leveraged funds. As appealing as profiting from 3x exposure sounds, it can also go the opposite direction and amplify losses. However, that doesn’t mean novice traders are on the outside looking in. Fortunately, Direxion offers an education center focused on leveraged and inverse ETF products where traders can sharpen their mental tools.
For more news, information, and analysis, visit the Leveraged & Inverse Content Hub.
