Micro-Cap ETFs: What You Should Know
January 19th at 1:00am by Tom Lydon
Investors seeking exposure to the smallest companies with the most growth potential would be interested in micro-cap companies. Because of the very small size of these companies, exchange traded funds (ETFs) are an ideal tool to gain exposure.
The term “micro-cap” refers to a company’s market capitalization, or the total value of the company’s stock. Micro-cap stocks tend to be low-priced and have low trading volume. According to the Microcap Stock Guide For Investors, the following information is important to know when investing in these stocks:
- The biggest difference between a micro-cap stock and another asset class is that the latter has less public information about it because of its size. The companies are much more vulnerable and volatile. [Why these companies are positioned for upward growth.]
- Micro-cap stocks are the most risky. Some have no assets or track record, while others are still in R&D mode.
- They have more sensitivity to low trading volume, and any size trade can have an impact on the share price.
Micro-cap companies are the smallest ones – often so small that you may not have heard of them. Each index provider has its own definition of what constitutes a micro-cap. [Do micro-caps have a place in your portfolio?]
For example, Standard & Poor’s defines small cap as companies with a market cap of $300 million to $1.5 billion. Dow Jones looks at the largest 5,000 stocks and numbers 751 through 2,500 are put in the Dow Jones U.S. Small-Cap Total Stock Market Index and numbers 2,501 through 5,000 are placed in the Dow Jones U.S. Micro-Cap Total Stock Market Index. [Growth vs. Value.]
Owning micro-caps in an ETF can be especially advantageous, since, as noted earlier, information on these companies is not as voluminous as information about large-caps. Just be sure to look under the hood to determine you’re getting the sector exposure and expense ratio you want.
For more stories about micro-caps, visit our micro-cap category.
- iShares Russell MicroCap Index (NYSEArca: IWC)
- PowerShares ZACK MicroCap Portfolio (NYSEArca: PZI)
- First Trust Dow Jones Select MicroCap Index (NYSEArca: FDM)
