The SEC Suspends 26 Microcaps, But ETFs Don't Feel It

The Securities and Exchange Commission (SEC) suspended trading of 26 microcap companies, but the microcap exchange traded funds (ETFs) don't appear to be affected.

The suspensions will be in effect until March 27, and they're part of the SEC's increased effort to address fraud in microcap securities. There are questions about the accuracy of information regarding the companies' status as publicy traded, reports The Associated Press.

The SEC cautions investors be be aware of the risks associated with microcaps and to consider these suspensions and any information currently available or released by them in the future.

Microcaps are seen as particularly risky because they're not regularly researched by analysts, information can be hard to come by and they are thinly traded. The majority of these companies, which have a market capitalization of $250 million or less, are highly volatile, according to Microcap Markets.

The ETFs that contain microcaps are:

• First Trust Dow Jones Select Microcap (FDM), down 12.2% year-to-date
• iShares Russell Micorcap Index (IWC), down 15% year-to-date

None of the suspended companies appear to be major holdings of these ETFs.

The suspended companies are: Andros Isle Development Corp.; Asante Networks Inc.; Beluga Composites Corp.; Cobra Energy Inc.; Complete Care Medical Inc.; Disability Access Corp.; El Alacran Gold Mine Corp.; Extreme Fitness Inc.; Gaming Transactions Inc.; Global Equity Fund Inc.; HealthSonix Inc.; IQ Webquest Inc.; JSX Energy Inc.; Kensington Industries Inc.; Kingslake Energy Inc.; L International Computers Inc.; Let's Talk Recovery Inc.; Mobilestream Inc.; Mvive Inc.; Native American Energy Group Inc.; Paramount Gold and Silver Corp.; Regal Technologies Inc.; Remington Ventures Inc.; Straight Up Brands Inc.; Transglobal Oil Corp.; and Turquoise Development Co.

Understanding the Anatomy of a Crash Can Help With ETF Investments

Today's market environment can be confusing - one minute market averages and exchange traded funds (ETFs) are at all-time highs, the next they're heading for the bottom.

The volatile market has created a lot of pain and uncertainty, and many are left wondering if a market crash is looming or happening right now.

Bill Barker for The Motley Fool ponders this thought and thinks back to 1934, when Benjamin Graham, the father, grandfather, founder, and creator of securities analysis came up with these three forces behind a market crash:

 

1. The manipulation of stocks. Since the advent of more market regulation by the federal government, with the creation of the Securities and Exchange Commission (SEC) in 1934, there's less potential today for manipulation. New regulations on the books keep most manipulation relegated to the micro-caps.
2. Lending money  to buy stocks. This issue is still a problem today. Excessive use of margin contributed to the market collapse earlier this decade and in 1929. A record high of $381 billion in margin debt was recorded in July.
3. Excessive optimism. We've got that, and current price-to-earnings (P/E) ratios reflect it. Some stocks are squarely in range of normal P/Es and sport record amounts of cash on their balance sheets and continue to replenish reserves even as they re-purchase shares.

The markets are unpredictable, but if you stick to your investment strategy and subtract emotions from the equation, you will be equipped to handle the ride.

Small Cap and Microcap ETFs

Each index provider has a different definition for small cap and micro cap stocks within exchange traded funds (ETFs). For example, the S&P defines small cap as companies with a market cap of $300 million to $1.5 billion, but the Dow Jones looks at the largest 5,000 stocks and numbers 751 through 2,500 are put in the Wilshire Small-Cap Index and numbers 2,501 through 5,000 are placed in the Wilshire Micro-Cap Index.

With small cap and micro cap ETFs defined, Seeking Alpha offers investing suggestions on how to use them:

• Ways to diversify your portfolio
• When to use micro cap ETFs
• Tips on shorting micro cap ETFs
• Which ETFs are best for hedging
• When to exercise caution

Potential in Small Companies with Stealth ETF

The Claymore/Sabrient Stealth ETF (exchange traded fund) tries to find the best investments that haven't caught Wall Street's eye. Claymore/Sabrient Stealth (STH) is based on a theory that companies with undiscovered potential will produce plenty of positive results. Although there is research to prove this, not all stocks lacking analyst coverage can be great investments.

Sabrient Systems hunts for hidden companies in the small or micro cap universe. They look for high appreciation potential with a set of growth-and-value oriented quantitative criteria like cash flow yeilds, return ratios and relative valuation, reports Trang Ho in Investor's Business Daily.

Microcap ETFs on the Radar Screen

Microcap stocks and exchange traded funds are rarely on the radar screen of the average investor. During times of economic growth, the smallest companies are nimble and able to ramp up quickly to handle demand. At the same time, small companies can downsize when they need to weather an economic storm.

Currently, there are three choices for a microcap ETFs: The PowerShares Zacks Microcap Portfolio (PZI), First Trust Dow Jones Select Microcap (FDM), and the iShares Russell Microcap (IWC). Zoe Van Schyndel, looks at each of these ETFs and finds that they invest in microcap stocks, but in different ways.  One looks at market cap, another at liquidity and a third at risk return.an article, states funds also provide diversification benefits, because the companies composing their portfolios don't move in step with other market capitalizations.

Diamonds (DIA) Are Forever

There has been a recent shift in investor sentiment from small cap and international stocks to defensive large cap stocks. A drop in the GDP growth rate from 5.6% in the first quarter of 2006 to 2.5% in the second quarter and an inverted yield curve that is much more significant that the inversion that occurred earlier this year is leading some market observers to believe we may continue to see a slowdown in the economy through the second half of 2006. Another reason for this move from small cap stocks, which have performed exceedingly well over the last three years, has to do with the fact that despite five years of earnings growth, the blue chips have not seen a whole lot of price appreciation as this chart illustrates in vivid detail.

Not surprisingly according to the latest edition of the Hulbert Financial Digest, which tracks the performance of investment newsletter editors, the most popular stocks amongst newsletter editors through July 31^st, 2006 are Johnson & Johnson (JNJ), Microsoft (MSFT) and Pfizer (PFE).

With this perspective in mind, lets take a look at two interesting ETFs that were introduced a little less than a year ago and track micro cap stocks. PowerShares Zacks Micro Cap ETF (PZI) and iShares Russell Microcap Index (IWC) provide a good alternative to investing in volatile individual microcap stocks and for the first 8 months outperformed the Dow. However over the last four months, these ETFs have given up most of their gains to end up back where they started last year. This trend is likely to continue during the coming months and large cap value ETFs like the Dow Diamonds (DIA) are getting their shine back.

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"Asif Suria is a guest author at ETFtrends and the editor of an investment newsletter called SINLetter. The author of this article is not a registered financial advisor and does not give investment advice. This article does not comprise any solicitation to buy or sell securities, ETFs or other investment vehicles".

With Most Micro-cap Funds Closed, Micro-cap ETFs Are a Solid Choice

Micro-cap fund managers have been closing their doors after the big run-up in 2003-2005. The logical alternative for investors looking to grab hold of a diversified group of stocks in this space (market capitalizations below $250 million) is Micro-cap ETFs.  Unlike actively managed micro-cap funds, these new ETFs offer greater diversification and the opportunity to see what you actually have in your portfolio. (Because of the competitiveness and liquidity in the micro-cap marketplace, most fund mangers are tight-lipped.)

The iShares Russell Micro-cap Index (IWC), the PowerShares Zacks Micro Cap Portfolio (PZI) and The First Trust Dow Jones Select MicroCap Index (FDM) are the ETFs representing this  field. The International Herald Tribune did a nice job covering this asset class in a recent piece.