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Manage Micro-Caps With These ETFs

editor@etftrends.com (ETF Trends)

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 (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.

Related: Small Stock ETFs Rally

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.

Related: Small Cap ETFs Bounce Back

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.

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Other ETFs tracking micro-caps include the PowerShares Zacks Micro Cap Portfolio (PZI) and the Guggenheim Wilshire Micro-Cap ETF (WMCR) .

PZI tracks a smaller portfolio of 400 micro-cap stocks. The underlying index identifies micro-caps with the greatest potential to outperform passive benchmarks and other actively managed strategies.

WMCR “tracks the Wilshire US Micro Cap Index, a rules-based index made up of the lowest 2,500 stocks in the Wilshire 5000 Index, as measured by market capitalization,” according to Investopedia.

For more information on micro capitalization funds, visit our micro-cap category.

iShares Micro-Cap ETF


The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.