Small- and micro-cap exchange traded funds (ETFs) have a lot of appeal with investors. After all, they’re viewed as having more growth potential than their better-established but slower-growing large-cap counterparts.
But are micro-caps an endangered species as they get too big for “micro” stature? After all, as of Sept. 30, the Russell MicroCap Index had an average market capitalization of $268 million, and its largest component was $983 million, reports Heather Bell for Index Universe. (The benefits of micro-caps).
Micro-cap companies are the smallest ones – often so small that you may not have heard of them. Each index provider has its own definition of what constitutes a micro-cap. For example, Standard & Poor’s defines small cap as companies with a market cap of $300 million to $1.5 billion. Dow Jones looks at the largest 5,000 stocks and numbers 751 through 2,500 are put in the Dow Jones U.S. Small-Cap Total Stock Market Index and numbers 2,501 through 5,000 are placed in the Dow Jones U.S. Micro-Cap Total Stock Market Index.
Micro-caps are a bit under-represented in the ETF space, with just four funds in all:
- iShares Russell MicroCap Index (NYSEArca: IWC): up 19.2%year-to-date
- PowerShares ZACK MicroCap Portfolio (NYSEArca:PZI): up 7.5% year-to-date
- First Trust Dow Jones Select MicroCap Index (NYSEArca: FDM): up 14.5% year-to-date
- Claymore/Sabrient Stealth (NYSEArca: STH): up 16.9% year-to-date
IWC is the largest fund, with roughly $290 million in assets under management. Its underlying index holds 2,000 stocks, but the fund itself is optimized and includes 1,317 stocks. (Why micro- caps perform in a recovery).
PZI is a distant second to IWC in terms of assets, with just $47.8 million. PZI’s underlying index is designed to target companies that Zacks believes are likely to outperform the broad micro-cap category.
FDM has roughly $16.8 million in assets and charges an expense ratio of 0.60%. Components are selected based on liquidity and fundamentals from the designated size range, as defined by the two smallest size stocks listed on the New York Stock Exchange.
STH is the smallest ETF in the category and gives a different twist on the space. Specifically, it includes “neglected stocks” and ADRs.
For more stories about micro-cap ETFs, visit our micro-cap ETF category.