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Microcap ETF: Hidden Gem or Small Business Scapegoat?

29 July 2008 at 12:05 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

With the exception of WD-40, you probably haven’t heard of any of the companies in the Russell Microcap Index. That’s because these publicly traded entities are the smallest of the small fries… the miniature "wanna-bees" of tomorrow’s small- and/or mid-sized American businesses.

When the U.S. economy reaches its lowest ebb, and businesses begin growing once again, one might expect the smallest to grow the fastest. The iShares Russell MicroCap Index Fund (IWC) will be available to capture that moment.

Not surprisingly, this fund has been giving mixed signals about the future for small business. With Tuesday’s "consumer-hanging-in-there" rally, IWC will once again climb above its short-term, 50-day moving average.

Unfortunately, investors have been "head-faked" on this particular technical signal before. The iShares Russell MicroCap Index Fund (IWC) temporarily rallied off the subprime summer lows of 2007, only to crater shortly thereafter. IWC responded to the Bear Stearns bailout off the March lows as well, only to plummet in the June/July swoon.

At a price point of roughly $46 per share, the iShares Russell MicroCap Index Fund (IWC) is 23.5% lower than its October 2007 highs. That’s not too much worse than the S&P 500.

In fact, one might make the case that the iShares Russell MicroCap Index Fund (IWC) has been closing the gap. Both the S&P 500 SPDR Trust (SPY) and IWC peaked in October 2007. Yet, IWC fell harder and faster out of the gate. However, the 1000 (10%) point differential that existed in March has been cut to less than 2.5%. 


Assuming that past business cycles are an indication of what we can expect in the future, investors might want to wait for another technical sign of strength in microcaps; that is, the iShares Russell MicroCap Index Fund (IWC) has yet to convincingly lead the S&P 500. (You have to go back to Q2 2006.) When the tables do turn, however, that may be a sign that small business is seeing better things ahead.

It won’t feel like the economy is improving when we’re at the mid-point of this "common-sense" recession; that said, using the October highs as a starting spot for both IWC and SPY lets us identify the point at which IWC has gone from underachiever to equality. And that equality may indeed represent the mid-point of the recessionary/stagflationary force gripping the economy today.

Why get so excited about the mid-point? Because it is at that time that stock markets begin to rise, defying everyone’s expectations and beliefs. And it will happen… long before anyone believes that good things are possible.

(Note: "Alt energy" may not be faring any better than other sectors in the bear. Yet here are a number of "smaller" company green ETFs for the true believers.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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