Invest in the small world of micro-caps.
Micro-cap stocks — typically defined as stocks between $50 million and $300 million in market capitalization — are among some of the most overlooked stocks on Wall Street. In fact, that’s part of the allure: The almost complete lack of analyst coverage and media following creates the potential for untapped value across the board. The downside? These stocks often have few resources, and are thus extremely vulnerable during economic downturns, plus their high risk leads to them being quickly jettisoned in market downturns. Investors that still want to harness micro-cap stocks do have a safer option: exchange-traded funds.
iShares Micro-Cap ETF (ticker: IWC)
iShares is the leader in the micro-cap space despite its IWC garnering just $850 million in assets under management. This is a necessarily wide fund, with iShares spreading around its risk by holding 1,355 micro-cap stocks at present. While you might imagine tech startups as crowding this fund, IT is only third in sector exposure at 13.6 percent — financials lead with a big 27.5 percent chunk, followed by health care at 19.7 percent. While IWC is a micro-cap fund, top holdings like Mercury Systems (MRCY) and NutriSystem (NTRI), at about $1.6 billion each, are very much in the small-cap camp.
Expenses: 0.6 percent or $60 per $10,000 invested
Wilshire Micro-Cap ETF (WMCR)
Wilshire’s entry into the micro-cap space is somewhat narrower at just 802 holdings, but it’s also a more pure play on micro-cap stocks. The WMCR boasts an average market capitalization at the top of the micro-cap range, at $300 million, versus a $453 million market cap average for IWC. From a sector construction standpoint, though, the funds are pretty similar; WMCR has a slightly higher weighting in financials (31.4 percent), offset by slightly smaller health care (18.5 percent) and information technology (12 percent) allocations. Top holdings include oilfield supplier Basic Energy Services (BAS) and fiber-optic networking product provider Applied Optoelectronics (AAOI).
Expenses: 0.59 percent
First Trust Dow Jones Select MicroCap ETF (FDM)
First Trust’s micro-cap stock ETF is even thinner, boasting just 273 holdings — but that’s thanks in large part to its methodology, which includes not just screening for market capitalization, but also factors such as trailing price-earnings ratio, operating profit margin and six-month total return. That results in a fund that’s almost half invested in financial stocks, as well as heavier concentrations among its top holdings, including a 1 percent weight for Enterprise Financial Services Corp. (EFSC) and 0.95 percent to Piper Jaffray Cos. (PJC). FDM’s blend also has resulted in long-term outperformance of the previous two funds.
Expenses: 0.6 percent
PowerShares Zacks Micro Cap Portfolio ETF (PZI)
PowerShares’ PZI is an interesting fund in that it offers access to a micro-cap index provided by Zacks Investment Research. PZI typically invests in 400 micro-caps, defined as companies between 0.15 percent and 0.015 percent of the capitalization of the largest domestic stock at the time of rebalancing, so the average market cap is a bigger than the traditional high-end definition at $416 million. What makes PZI stand out is portfolio construction — while financials lead yet again at 37.9 percent, industrials are well-represented at 14 percent, as are consumer discretionary (11.3 percent) and energy (10.1 percent). Health care is just 2 percent of the fund.
Expenses: 0.81 percent
Deutsche X-trackers Russell 2000 Comprehensive Factor ETF (DESC)
Deutsche Bank’s (DB) DESC fund is a micro-cap/small-cap hybrid that boasts an average market cap of nearly $1 billion, though 60 percent of its holdings qualify as micro-caps. Here, you’re getting a wide swath of the market at nearly 1,500 stocks, and holdings are screened for quality, value, momentum, low volatility and size. Financials (29.5 percent) rule again, but industrials (18.8 percent) and consumer discretionary (15 percent) have even more clout in this fund. Top holdings at the moment include Bob Evans Farms (BOBE) and electrical construction services provider MYR Group (MYRG). DESC is also dirt cheap for a micro-cap fund.
Expenses: 0.3 percent
AdvisorShares Cornerstone Small Cap ETF (SCAP)
AdvisorShares’ SCAP is about as far up the spectrum as you can go without sacrificing significant micro-cap exposure. The fund, in fact, is a majority small caps at 52 percent, with micro-cap stocks making up 44.5 percent of the fund. That said, SCAP gives you a much different look at the market than the rest of these funds with a sector breakdown that includes IT at 23 percent, industrials at 15 percent and health care at 12 percent. What about financials? They’re tied with discretionaries for fourth at 11 percent. Unfortunately, SCAP isn’t just big on market cap — it’s big on expenses, too.
Expenses: 0.9 percent
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6 ETFs That Let You Buy Micro-Cap Stocks originally appeared on usnews.com
