To date, a handful of micro cap ETFs have been introduced. They differ from one another to a much greater extent than do the larger cap ETFs. Notice that the top five holdings of each ETF are completely different; you don’t find Exxon Mobil and Apple in every list, as you do with large cap growth funds.
Despite the differences, all three funds discussed next have seen rather lackluster performance since their inception. It may be possible that microcaps are a particular kind of asset class (commodities would be another) where indexed ETFs may be less than the ideal vehicle.
The performance may have something to do with the illiquidity of microcaps (it’s not always easy to buy and sell shares on the open market). Time will tell. In the meantime, proceed with caution, and if you want to invest in any of these funds, do so with only a modest percent of your portfolio.
iShares Russell Microcap Index ETF (IWC)
Indexed to: 1,300 of the smallest publicly traded companies, all culled from the Russell 3000 Index
Expense ratio: 0.60 percent
Average cap size: $400 million
P/E ratio: 29.1
Top five holdings: Acacia Research–Acacia Tec, ARIAD Pharmaceuticals Inc., Kodiak Oil & Gas Corp., Buckeye Technologies Inc., Dollar Financial Corp.
There aren’t a lot of choices in this field and you’re not going to like paying 0.60 percent, which is high for an ETF, but that’s the going rate in the micro cap area, so what are you going to do? Caveat: One-quarter of the stocks held in this fund are financial stocks.
PowerShares Zacks Micro Cap Portfolio ETF (PZI)
Indexed to: The proprietary Zacks Micro Cap Index, which includes roughly 400 micro cap stocks chosen for “investment merit criteria, including fundamental growth, stock valuation, investment timeliness . . . .” In other words, someone behind the scenes is stock picking.
Expense ratio: 0.60 percent
Average cap size: $400 million
P/E ratio: 15.2
Top five holdings: TravelCenters of America LLC, Hercules Offshore Inc., Gramercy Capital Corp., Mercer International Inc., web.com Group Inc.
This ETF’s selections yield an average cap size that makes it a contender if you want eensy-weensy company exposure, despite the active management. There is also a bit less industry concentration than exists with the iShares option — only one-fifth, as compared to one-fourth, of this fund’s portfolio is in financial stocks.
First Trust Dow Jones Select MicroCap ETF (FDM)
Indexed to: Dow Jones Select MicroCap Index, which contains about 200 of the smallest stocks listed on the New York Stock Exchange and the NASDAQ
Expense ratio: 0.60
Average cap size: $390 million
P/E ratio: 17.5
Top five holdings: Buckeye Technologies Inc., Lindsay Corporation, Strategic Hotels & Resorts Inc., iStar Financial Inc., First Industrial Realty Trust Inc.
The expense ratio is the same as the others, and the average cap size is not much different. All in all, everything else looks okay, but this fund offers less diversification. In fact, there’s a lot of industry concentration — at last glance, more than 27 percent in financials. For that reason, this fund gets the bronze metal, and gold and silver go to the iShares and PowerShares options.