Small-cap stocks are known to be volatile, so it stands to reason to that micro-caps are seen as not for the faint of heart, but investors can mute some of that volatility by eliminating stock-picking and opting for a passive approach.
That can include the iShares Micro-Cap ETF (NYSEArca: IWC). Micro-cap companies have a market capitalization of around $50 million and $300 million, or less than small-cap stocks. Typically, investors will notice that larger capitalization stocks are less risky, generating smaller but more steady returns. In comparison, smaller company stock see greater swings, but the added risk comes with potentially greater returns.
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The small-cap segment was able to jump on the risk-on sentiment in March after the Fed stated it would only hike interest rates two times later this year, or downwardly revised from the four hikes it expected back in December. The extended low-rate environment has been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
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IWC “tracks the market cap weighted Russell Microcap Index, which is composed of the smallest 1,000 stocks contained in the Russell 2000 Index, excluding over the counter (OTC) issues. The fund may invest up to 10% of its assets in futures, swaps or options, as well as in securities not contained in the underlying index,” according to Investopedia.
While IWC has produced some attractive returns, potential investors should be aware that liquidity issues in the underlying micro-cap stocks can drag on performance of the overall fund as the underlying index’s buy and sell orders can move prices against the fund.