Mitigate the Risk of Micro-Caps With ETFs | ETF Trends

Exchange traded funds (ETFs) are a useful way to get market exposure, but their structure is even more useful in some areas than others. Take micro-cap stocks.

Micro-caps – companies with market capitalizations of between $1 million and $100 million – are often the names you’re least familiar with. You can spend hours researching them, sayss Richard Morrison for The Financial Post. Information on them is simply not going to be as readily available as it is with companies like General Electric (NYSE: GE) or Google (NASDAQ: GOOG).

Further, these companies are generally new ones without a track record. They may not have any assets or their products are still going through the testing phase. Liquidity can be an issue with micro-cap stocks, too, because they often have low trading volume.

On the plus side, though, is that if you’re in on a successful micro-cap early, you could reap some real rewards.

But that’s where these ETFs come in:

  • iShares Russell Microcap (NYSEArca: IWC): Has the largest number of holdings at 1,332; the largest is weighted at 0.4%.
  • Wilshire Micro-Cap ETF (NYSEArca: WMCR): Has 863 holdings; the largest has a weighting of 1.1%.
  • PowerShares ZACK MicroCap Portfolio (NYSEArca: PZI): Has 400 micro-cap companies; the largest has a weighting of 0.4%.

All three funds give you a play on this little corner of the market, saving you the trouble of researching a mess of unproven companies and giving you exposure to the entire micro-cap space. As you can see, no fund offers a particularly large weighting to any single company, so the funds aren’t generally swayed by the moves of just a few holdings.

For more information on micro-caps, visit our micro-cap category.

Max Chen 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.