If you are optimistic about the stock market and believe that there is great growth that will occur over the next year, micro-cap companies and the exchange traded funds (ETFs) that hold them may be the ticket.
Small companies are sitting pretty these days. They not only tend to outperform the markets over the long-term, but they generally outperform larger corporations in economic recoveries. [Micro-Cap ETFs In Position.]
Although micro-cap companies are riskier than large ones, the reward can be far greater in a growth cycle.
Micro-caps are generally companies worth between $100 million and $300 million with stock that trades fewer than 50,000 shares a day. At those low volume levels, they often fly under the radar, says David Sterman for Investing Answers. The bid-ask spread can be large with a micro-cap, and these companies are usually immature, which means that a great quarter can be followed by a bad one. [Micro-Cap ETFs: What You Should Know.]
An ETF dilutes the risks of micro-caps, as they give exposure to a basket of companies. Investors tend to limit their exposure to only large and solid companies when the economy slumps, leading to sharp underperformance for small-caps and micro-caps, and this is why the growth potential is so great once the economy turns.
Another benefit of micro-cap ETFs is that they eliminate the need for single-stock picking, which is a challenging venture in the micro-cap universe.
There are three micro-cap ETFs available today:
- iShares Russell MicroCap Index (NYSEArca: IWC)
- First Trust Dow Jones Select MicroCap Index (NYSEArca: FDM)
- PowerShares ZACK MicroCap Portfolio (NYSEArca: PZI)
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.