Small-cap stocks and related small-cap ETFs are on a torrid pace this year, but investors looking for even more exciting gains with ETFs tracking small companies may want to consider 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.
IWC, which is up 11.69% year-to-date, follows the Russell Microcap Index. The micro-cap ETF is handily outperforming widely followed large- and small-cap benchmarks this year.
“The Russell Microcap Index, which includes the smallest 1,000 securities in the US small cap Russell 2000 Index, has a return of 11.5% in 2018, exceeding the performance of Russell US Indexes measuring small-, mid-, large- and mega-cap stocks,” according to FTSE Russell.
Why IWC Is Working
Small-caps are focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.
“With many of 2018’s equity headwinds being international in nature, the Russell Microcap Index has outperformed the other major cap tiers thanks to micro caps’ lower international sales exposure,” said FTSE Russell Managing Director Alec Young. “Being more domestic has insulated micro caps from trade tensions, geopolitical worries and the earnings drag stemming from a stronger dollar. Being less global also gives micro caps more exposure to several positives including tax reform, increasing deregulation and faster US economic growth relative to weaker recoveries in Europe and Japan. All these tailwinds are helping drive faster profit growth for micro caps relative to their blue chip counterparts, helping fuel YTD leadership.”
IWC holds nearly 1,360 stocks and allocates nearly 26% of its weight to the healthcare sector, an exposure composed primarily of biotechnology and pharmaceuticals companies. Financial services is IWC’s second-largest sector weight at just over 23%.
For more information on the small capitalization segment, visit our small-cap category.