As we look forward to better economic growth, investors are regaining their risk appetite. Consequently, small- and micro-capitalization stocks and exchange traded funds are gaining momentum.
Small and microcap stocks, which have market capitalizations of about $50 million to $300 million, are the most volatile market segment and generate a larger portion of their revenues from within the U.S., writes Max Isaacman for Minyanville.
Additionally, small-cap companies are largely in the crosshairs of potential corporate buyouts, which will likely increase as the economy improves.
Typically, during the initial stages of a bull market rally, the more nimble small capitalization stocks are able to quickly ride the wave upward.
However, on the downside, small-cap companies tend to get hit the hardest during financially tight periods, such as the 2008 financial crisis when it was particularly difficult to access free capital.
Micro-cap ETFs have been outperforming the S&P 500. For instance, the Guggenheim Wilshire Micro-Cap ETF (NYSEArca: WMCR) gained 10.2% over the past three months and the PowerShares Zacks Micro Cap Portfolio (NYSEArca: PZI) is 11.7% higher, compared to the 6.5% rise in the S&P 500 over the same period.
WMCR holds about 800 components and no single company makes up more than 1.1% of the overall assets. Financial sector stocks make up 26% of the fund, followed by 23% in health care, and 18% in technology.