Request for Micro-cap ETF's
I received reader requests for more small-cap ETF suggestions after Wednesday's article, so today I want to introduce an even smaller class – micro-cap ETFs. Micro-cap stocks are the smallest of the small, with market-caps under $300 million. Every investor's dream is to buy these little guys and then ride them as they ascend to greatness – first by becoming a small-cap, then a mid-cap, and ultimately a large-cap. Along the way, long-term investors make mouth watering profits that can eclipse the 10,000% threshold.
Just like small-cap ETFs, micro-cap ETFs can help investors gain exposure to a class of stocks that tends to outperform in boom times as well as after a recession, without having to pick individual winners. Of course, my job is to help you find these individual winners, and subscribers to SmallCapInvestor PRO are enjoying returns on both small-cap and micro-cap stocks that no ETF can touch.
Two highly profitable micro-cap stocks that I just added are already showing gains, and subscribers have been raving about my research reports on these stocks. One is a low cost gold miner with a market cap of $178 million and the other is a fast growing gaming company with a market cap of only $97 million. I expect both of these stocks to double in 2010, and you can be among the first to get in on shares. Just click here to learn how you can sign up for a no-risk trial membership to SmallCapInvestor PRO and read my full report on each stock.
But when you're willing to sacrifice some of the upside potential of individual stocks for the decreased risk that comes with a diversified approach, micro-caps represent a compelling alternative. Three options are the iShares Russell Micro-Cap Index Fund (NYSE: IWC), the First Trust Dow Jones Select Micro-Cap ETF (NYSE: FDM), and the PowerShares Zacks Micro Cap Portfolio (NYSE: PZI).
The biggest, and the most popular, of these is the IWC which holds the smallest 1,000 stocks in the Russell 2000 small-cap index, as well as 1,000 other small company stocks. The fund is designed to track the performance of the Russell Microcap Index and 2009 returns were a solid 23.7%. Right now the average P/E for stocks in the IWC is 12.4 and the average market cap is $245 million. The fund is overweight sectors such as financial services (22.8%), healthcare (15.6%), and hardware (10.4%).
First Trust's micro-cap fund, the FDM, has only around 270 stocks in the fund and has a high turnover rate, around 85% annually. It also has a high concentration in its top ten holdings, 8.1% to be exact, so these stocks tend to drive returns. It posted nice gains of 20% in 2009 and is currently overweight financial services and consumer goods, so it would be a good choice if you think these sectors will rally early in 2010, as many investors do. Stocks in the fund have an average P/E of 14 and an average market cap of $315 million.
Finally, the PZI from PowerShares has stocks with the lowest average PE, 12.8, while the average market cap of $287 million puts it smack between the IWC and FDM. With 10 of the fund's 400 stocks representing only 4.4% of the fund's assets it is a reasonably diversified option. However, this diversification did lead to rather conservative gains of only 12.1% in 2009.
Micro-cap ETFs certainly play a role for investors looking for diversification at the smallest end of the market capitalization spectrum, but they come with their own risks. Because the funds need to buy hundreds of tiny companies, they are likely to hold companies that may go bankrupt, while the more successful ones grow to market caps that require their removal from the fund. As a result, investors are no longer shareholders in the best of the best – this can only be achieved by purchasing shares of the individual companies.
I like to hold individual stocks so my favorite way to use micro-cap ETFs, like the three I discuss here, is to visit Morningstar's website, look up an ETF, and analyze the stocks in the fund. This provides a relatively efficient screening tool that helps me to locate small companies that are outperforming in their asset class.
In a three part SmallCapInvestor Daily series I wrote in December, I outlined how individual investors can find winning small-cap stocks by analyzing the holdings of small-cap mutual funds. A similar approach works for micro-cap ETFs. You can read that series by clicking on Part I, Part II , or Part III. You can also visit www.smallcapinvestor.com where there is a catalogue of past issues of SmallCapInvestor Daily.
Using that technique led me to recommend consumer goods company Wolverine World Wide (NYSE: WWW), a stock that has posted modest gains since I recommended it on December 15th and is still a very compelling investment. Read my write-up on that stock by clicking here.
Email your favorite stock to me at editorial@smallcapinvestor.com and I'll give you my thoughts in a future issue.
*** As you know, I was bullish on China throughout 2009. And my SmallCapInvestor PRO readers benefited with 100% and 123% gains from two of my top Chinese recommendations.
To help investors learn more about how they can invest in China small-cap stocks, I'm airing my latest video investment conference on January 20, at 6 pm ET.
It's called China Inc.: Understanding China for Outstanding Profits. I'll be discussing why China's quasi-corporate structure will continue to reward investors and I'll focus on the sectors that will likely lead to big investment gains for you. I'll also be sharing some of my top Chinese investments in sectors that represent tremendous profit opportunities.
This event is completely free for SmallCapInvestor Daily readers. And I'm expecting a strong turnout for China Inc.: Understanding China for Outstanding Profits so I hope you'll take advantage of this opportunity and reserve you seat by clicking here now. Again, it's free to attend, and I expect the available seats will fill up fast.
*** As a final note, our offices will be closed this coming Monday to observe Martin Luther King Day. You will receive your next issue of SmallCapInvestor Daily on Tuesday, January 19 when our normal publishing schedule resumes. Enjoy the long weekend.
