Exchange traded funds (ETFs) that invest in micro-cap stocks haven’t been as successful as those tracking larger companies, at least in terms of gathering assets.
Now, some analysts argue that when it comes to investing in micro-caps, it’s worth it to pay the higher fees of traditional mutual funds in this category.
Morningstar analysts Paul Justice and Sam Lee argue that mutual funds provide safer and more profitable exposure to micro-caps as compared to ETFs, writes Esther Pak for Morningstar.
Since micro-caps are less liquid than large-caps, micro-caps may command wide bid-ask spreads in related ETFs. As a result of the way ETFs try to reflect their underlying benchmarks, micro-cap ETFs may come with high trading costs. Sam Lee of Morningstar reports that 22 of 23 micro-cap funds he sampled performed better than the average micro-cap ETF over at least three years.
It should be noted that ultra small, micro-cap companies are high-risk investments. [Mitigate the Risk of Micro-Caps With ETFs.]