Investing in Micro Cap ETFs
Monday, December 21st, 2009ETF Database submits:
Many investors choose to build their portfolios around core holdings in large and mega cap equities, investing in the S&P 500 or a similar benchmark. Beyond “blue chips,” many round out portfolio holdings with more moderate allocations to mid cap and small cap equities as a means of achieving diversification and potentially enhancing returns. But domestic equity exposure doesn’t stop with the Russell 3000. There are over 9,000 publicly traded companies currently available to U.S. investors, including thousands of micro cap equities. While these “smallest of the small” fall under the umbrella of domestic equities, they may have a unique risk and return profile that warrants a separate allocation in investor portfolios.
Micro Caps 101
A micro cap firm can generally be defined as a company that has a market capitalization of between $50 and $300 million (”small caps” can have a market capitalization of up to $2 billion). Micro caps tend to be uncorrelated with their larger peers; they can have a correlation as low as 0.60 with the S&P 500. Micro caps can exhibit volatile returns: among the major holdings of certain micro cap ETFs, year-to-date returns ranged from negative 41% to more than 1,100%.
