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Micro-Cap ETFs: 3 Funds For Capitalizing On American “Stick-to-it-iveness”

29 November 2010 at 1:30 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

One might have surmised that¬†the $113¬†billion dollars¬†to bail out country #2 of the European “PIIGS” would have calmed¬†financial markets. Yet the ongoing debt crisis in Europe¬†has been about as harmonious as¬†it was to have my youngest sister dictating the course of conversation¬†at the¬†Thanksgiving Day¬†dinner table.

(Note: I’m counting on the fact that the majority of my relatives don’t¬†usually read¬†my¬†financial commentary. If the joke makes it through the grapevine,¬†well then…¬†I apologize for the¬†humor¬†at¬†my¬†sister’s expense.)

Clearly, there are real risks in the investing world, from sovereign debt worries in Europe to Korean war games to escalating inflation in China. Nevertheless, there’s equally compelling evidence for the continuation of worldwide economic recovery… as well as the¬†asset appreciation that occurs alongside choppy recoveries.

For instance, since the U.S. market bottom in March of 2009, we’ve heard a great deal about the smallest businesses having difficulty getting access to credit for expansion; in contrast, only¬†the biggest companies¬†were able to shore up their balance sheets, sock away loads of cash¬†and/or borrow for ridiculously low rates in the¬†bond arena.

Let’s assume that the above-mentioned headlines have been accurate. Then¬†who¬†are the intrepid investors¬†willing to put dollars into¬†Micro-Cap ETFs?¬†Brave souls have witnessed¬†iShares Russell MicroCap (IWC)¬†significantly¬†outperform the S&P 500 SPDR Trust (SPY) since March of 2009.

IWC Since March 2009

Indeed, this may be an indication¬†on the part of the investing community to¬†capture exceptional earnings¬†growth rates from up-n-comers. It may also be an indication that a double-dip recession is hardly imminent… and that the U.S. economy may chug along in a choppy, but genuine, recovery.

What may make micro-caps particularly inviting for some¬†is the notion that most of the geo-political risks are global (i.e.,¬†North Korea v. South Korea, European country debt, China inflation). On the flip side, if employment trends stateside¬†become more¬†favorable… if consumers remain as confident as they were¬†in the Black Friday spending frenzy…¬†maybe the local economy will continue to mend.

Enter¬†micro-cap corporations — businesses that primarily cater to the local U.S. economy. In contrast, almost all of the larger corporations count on larger earnings growth rates to come from overseas operations.

It may be true that iShares Russell MicroCap (IWC) is the most prominent fund in this class. However, First Trust MicroCap (FDM) and PowerShares MicroCap (PZI) also fit the bill; that is, you do have choice among baskets of the smallest-sized companies.

Year-to-date, IWC and FDM have gained approximately 15%, whereas PZI is up a bit less at 10%. The situation becomes much more pronounced over the last 3 years, however. Whereas IWC and FDM may have lost in the neighborhood of -11%, PZI is still down about -30% since November of 2007.

How might one account for this discrepancy? First Trust¬†tracks a Dow Index and¬†Blackrock iShares tracks a Russell index with less internal turnover;¬†PowerShares MicroCap (PZI) tracks a more dynamic Zacks composite with a proprietary scoring system for “relative value.” In the turbulence of 2008, the Zacks scoring system was likely overwweight¬†the consumer and financial segments.


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Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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