There is one group of stocks that's absolutely crushing the
market this year. Since the beginning of the year, this sector of
the market is up 20 percent, versus around a 7.5 percent return
from the S&P 500.
Usually, to beat the market in a big way investors assume they
need to take on undue risk, or buy highly speculative stocks that
have a real possibility of seeing their share values get cut in
half on one bad news announcement.
Not so with this group of stocks. Investors can buy this diverse
group of stocks by entering one simple order with their broker. And
I have four potential ways you can play the trend, so in fact there
are even more diversification options within this sector for
investors who don't like to buy just one security.
***The group of stocks I'm talking about? Micro-cap
stocks. Typically defined as companies with market caps below $1
billion, these little companies have the greatest exposure to a
growing economy since they are usually nimble and can generate huge
returns on invested capital - if management makes wise
These companies do come with some inherent risk however. They
tend to have less cash on hand, and with smaller customer bases
they are exposed to economic downturns. But right now, with a
double-dip recession essentially off the table and a very low
interest rate environment, these companies are enjoying growth that
far outpaces many of their larger competitors.
***There are four ways for investors to gain exposure to a
basket of micro-cap stocks by either buying an exchange traded fund
(ETFs) or a mutual fund. Each takes a slightly different approach
to their stock selection criteria.
iShares Russell Microcap ETF
: This fund was started in 2005 and would be my first choice of the
four. With an expense ratio of 0.71% the cost of ownership is in
line with the three other options below, but its performance
generally outpaces the others in this group. The fund holds the
smallest 1,000 stocks in the Russell 2000 small-cap stock index, as
well as the next 1,000 smallest companies covered by the Russell
indices. Truth be told, a lot of the companies in this index are
not 'true' micro-caps since their market caps are a tad high, but
with wide exposure the fund provides a good single security option
for investors looking to tap into a strong sector.
Bridgeway Ultra-Small Company Market
: Bridgeway's management uses a quantitative model that strives to
keep companies with poor fundamentals out of the fund. While I like
this approach, lately a lot of poor fundamental companies have seen
their stocks soar as investors have taken on more risk.
Consequently, this fund's performance has lagged. The fund has an
expense ratio of 0.77%, and tries to emulate the return of the
Cap-Based Portfolio 10 Index which is published by the University
of Chicago's Center for Research in Security Prices.
First Trust Dow Jones Select MicroCap ETF
This fund strives to replicate the returns of the Dow Jones Select
Microcap Index and favors strong fundamentals such as price to
earnings ratio and price to sales ratio, as well as liquidity, over
other metrics. The net expense ratio is 0.60%.
PowerShares Zacks Micro Cap ETF
This ETF is a bit odd in my opinion in that the fund's prospectus
states that it is '
...based on the Zacks Micro Cap Index'
, and that 90 percent of total assets are in that index. I don't
follow this index, so it is a bit meaningless to me. However,
are available for viewing on the company's website, and with an
expense ratio of 0.70 percent the fund is not overly expensive to
***Of course where the rubber hits the road with these funds is
their individual performance and despite their exposure to small
companies posting big returns this year there are significant
differences between the funds over the last year.
The IWC has clearly outperformed, and in my opinion is the best
option of the group. I've looked at the returns of these four funds
over a longer duration, and this fund, along with the FDM, have
tended to both post higher gains, as well as hold their value
better than the other two.
***The strong move in micro-cap stocks should key investors in
to the benefits of exposure to small, high-growth companies. As
always, don't put all your eggs in one basket, and make sure your
investments match up with your particular risk profile.
Let me know if you have any questions about these funds, their
holdings, or their investment strategies. My address is:
the Biggest Gains ALWAYS Come from Micro-Cap
? Follow the link to find out why, and learn more about the
strategy we use to find small and micro-cap stocks, like two that
have risen 110 percent and 90 percent since our recommendation