Last week’s rally and news of a Spanish banking bailout over the weekend have raised hopes the market is recovering rather than experiencing a dead-cat bounce.
Investors should keep a close eye on microcap ETFs tracking the market’s smallest stocks because they usually lead when traders are embracing risk again.
Microcap stocks are generally viewed as companies with a market capitalization of less than $300 million.
“Historically, they’ve made up less than 2% of total market capitalization,” according to Morningstar analyst Samuel Lee.
Investors should be aware that microcap stocks are subject to high volatility and are extremely vulnerable to downturns – the smaller the capitalization, the riskier the investment but the greater the potential for returns. Their small stature allows them to act nimbly during market rebounds, often jumping ahead of bulkier large-cap stocks at the initial stages of a recovery.